African Journal of Business Management Vol. 5(11), pp. 4561-4572, 4 June, 2011 Available online at http://www.academicjournals.

org/AJBM ISSN 1993-8233 2011 Academic Journals

Full Length Research Paper

How to diminish the investment systematic risk?

Ming-Yuan Hsieh1, Chung-hsing Huang2, Tzung-Ming Yan3, Wen-Ming Wu4, and Chih-Sung Lai5
Department of International Business, National Taichung University of Education, Taiwan. 2 College of Management, National Taiwan University, Taiwan. 3 Department of Insurance, Chao-Yang University of Technology, Taiwan. 4 Department of Distribution Management, National Chin-Yi University of Technology, Taiwan. 5 Department of International Business, National Taichung University of Education, Taiwan.
Accepted 8 April, 2011
1

Starting in the 21 century and the challenges of the global economy, investors need to take vigorous tactics to face the competition for globalization. Financial investment environment changes with each passing day, investors satisfaction are more and more discerning, and market demands can fluctuate unpredictably. While facing the constant changes of the global financial markets, it is important to know how to break through the current situation, maintain an advantage and continuously make a profit. Many investors have the pressure of competing to positively adapt, to form a competitive investment strategy, and to have a great project management strategy. The traditional business investment is not enough to deal with the issues regarding new and various economic challenges. This study will focus on answering the topic of this research: Reducing systematic risk through portfolio theory and macroeconomic model. This dissertation attempts to answer the main question and secondary issues and stays focus on the comparison of these industrial regions consisting of ten industrial regions comprised of two developed industrial regions (USA and Japan) and eight high-growth industrial regions (Four Asia Tigers and BRIC). Significantly, this research deals with quantitative and empirical analysis of the prominent features and the essential conditions for portfolio theory and macroeconomic model and to evaluate the relative strengths and weaknesses of twelve stock markets of the ten industrial regions by examining three hypotheses. The discussion of the invested systematic risk index among ten industrial regions is presented by measuring competitive comparison of the first hypotheses under the factor analysis through the use of the principle component method of factor analysis. Further, in terms of second hypothesis, measurement of the ten industrial regions competitive comparison was addressed by analyzing the macroeconomic indicators data under the rotated method (Varimax method). Lastly, in terms of assessing the first and second macroeconomic models (first hypothesis and second hypothesis), the measurement focused on the scenario analysis and empirical analysis through the use of the fluctuate percentage of stock price index and stock market capitalization of twelve stock markets from 2004 to 2008. Key words: Portfolio theory (PT), systematic risk, macroeconomic model, factor analysis, capital asset pricing model (CAPM). INTRODUCTION Many investors have confronted more challenges due to the rapid capricious development of the world economic and financial investment environment. Starting in the 21 century and the challenges of the global economy, investors need to take vigorous tactics to face the competition for globalization. Financial investment environment changes with each passing day, investors satisfaction are more and more discerning, and market demands can fluctuate unpredictably. While facing the constant changes
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*Corresponding author. E-mail: uscpawisely@hotmail.com. Tel: +886-975-118-922.

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Invested risks

Unsystematic risk line Systematic risk line Invested time

Figure 1. Invested risks relationship.

constant changes of the global financial markets, it is important to know how to break through the current situation, maintain an advantage and continuously make a profit. Many investors have the pressure of competing to positively adapt, to form a competitive investment strategy, and to have a great project management strategy. The traditional business investment is not enough to deal with the issues regarding new and various economic challenges (Beck et al., 2000). This study will focus on answering the topic of this research: Reducing systematic risk through portfolio theory and macroeconomic model. Further, in order to face the countermeasures regarding the rapid change in the global and domestic industrial structures, and the service challenges posed by industrial regions with rapid economic developing growth, a large number of global investors have struggled to find out the resolutions and approaches to subside the invested risks and to obtain the invested profits from these rapidly expanding financial markets. In terms of the most efficient and effective analytical method, the portfolio theory and the macroeconomic model are the most directly analytical approach. In this research, the main research theory is to concentrate on the portfolio theory and the core methodology is focusing on the macroeconomic model. Further, this research is going to utilize the factor analysis, scenario analysis and empirical analysis to select the most impact of macroeconomic indicators in order to minimize the invested risks and maximize the invested profits. To take one step ahead, the invested risks are categorized into two types. First type is systematic risk (un-diversifiable risk) which is unavoidable by any invested portfolios and strategies. The second type is unsystematic risk (diversifiable risk) which can be avoided more by various invested portfolios and strategies as expressed in Figure 1. In addition, the twenty four macroeconomic indicators from various authorized official government statistic departments and the four academic professional economic institutes are considered to be the most efficient and effective macroeconomic model after the consideration of a large number of related lecture. All research methodology trend to the pared-down measurement procedures in order to offer the global readers and investors, a simplified economic and financial paper. Therefore, this research concentrated on discussing the relationships

discussing the relationships among the expected rate of return, realized rate of return and systematic risk priority number. The unsystematic risk is avoided through diversified invested strategies or activities. Further, this research created the connection between expected rate of return and systematic risk in order to achieve the perfect hedge. In order to define the main concept of this research, the preliminary and primary research questions consist of: (1) how does this research achieve systematic risk aversion for investors in financial markets and what evidence indicate that investors are generally systematic risk averse through macroeconomic model (Arrow, 1951); (2) what is meant by the covariance between economic factors in macroeconomic model and how do this research measure covariance between each macroeconomic indicator (Aizenman and Pinto, 2001); (3) how to minimize the systematic risk in the portfolio theory through creating the efficient comprehensive macroeconomic model (Beck and Loayza, 2000). The first research question aims at creating the effective macroeconomic model by the collected macroeconomic factors though factor analysis in order to achieve risk averse. The second and third research questions relate to finding the more outstanding covariance and correlation between macroeconomic factors through Varimax method (Varimax rotation) in order to adjust the macroeconomic model to match the invested market situation. The forth and final research question is the primary purpose of this research which is to achieve perfect hedge.
MATERIALS AND METHODOLOGY In terms of examining the complexity and uncertainty challenges surrounding portfolio theory and macroeconomic model, Beck et al., (2000) argued that five years of data was analyzed along with multimethods and multi-measures field research in order to achieve a retrospective cross-sectional analysis of industrial regions (Beim and Charles, 2004). These industrial regions consisted of ten industrial regions comprised of two developed industrial regions (USA and Japan) and eight high-growth industrial regions (Four Asia Tigers and BRIC) (Chang, 2007). This chapter not only characterizes the overall research design, empirical contexts, and research sample and data collection procedures, but is also designed to compare the ten industrial regions. Additionally, this chapter

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Fundamental Investment Concept of John R. Hicks (1931) to Disperse the Investment Risk

Initial Concept of Macroeconomic Model of Bautista (1988) and Capros et al. (1990)

Portfolio Theory of Harry Markowitz (1959)

Efficient Portfolio (CML) of Harry Markowitz (1959)

Macroeconomic Model (MEM)

Computable General Equilibrium (CGE)

CAPM of William Sharpe (1963)

Efficient Portfolio SIM of William Sharpe (1963)

Risks are dispersed two categories including systematic risk and unsystematic risk. Arbitrage Pricing Model of Stephen Ross (1976)

MEM of Challen and Hagger (1983): KeynesKlein (KK) model, PhillipsBergstrom (PB) model, WalrasJohansen (WJ) model, WalrasLeontief (WL) and Muth Sargent (MS) model.

Social Accounting Matrix (SAM), CGE accentuates three analytical factors (labor, manufacture product and financial market) in the macroeconomic model (Keynes, 1936)

Unsystematic Risk Different Invested Objectives and Portfolios to Decrease or Eliminate Unsystematic Risks

Systematic Risk Analyzing Macroeconomic Factors in order to minimize the Systematic Risk Modern Macroeconomic Model Utilizing Factor Analysis to Produce the Effective Macroeconomic Model for Analytical Industrial regions

Scenario Analysis & Empirical Analysis

Assessment on the Beta Priority Numbers of the Twelve Stock Markets of Ten industrial regions
Figure 2. Research design framework.

chapter inductively generates a few economic theories and follows by qualitative and quantitative data that was collected from many official government statistic departments and academically economic institutions for this analysis.

Research design The fundamental research design in this research is based on combining the portfolio theory (Hicks, 1931) and macroeconomic model in order to create the efficient and effective macroeconomic model (Hicks, 1939) to measure the beta priority number (beta coefficient) in the capital asset pricing model (CAPM) (Dufey and Ian, 1984). Further, in order to produce the macroeconomic model, this research follows earlier procedure of the research theory development framework as expressed in Figure 2 to build the research design framework as expressed in Figure 3. This research design framework not only focuses on the application of the portfolio theory, the macroeconomic model, and the assessment

method (Sharpe, 1964), but also concentrates on the macroeconomic environment for industrial regions that is measured by some major statistic macroeconomic factors (Shaw, 1973) that included GDP, Economic Growth Rate, Import, Export, Investment Environment, and Financial Trade which are from official government statistic departments such as Taiwans Bureau of Foreign Trade (MOEA) and USAs Federal Reserve Board of Governors and academic economy institutions such as the IMD, World Economic Forum (WEF), Business Environment Risk Intelligence (BERI), and Economist Intelligence Unit (EIU). Nevertheless, there are two potential macroeconomic factors that could have an impact on the analysis but are not discussed in this research design due to these factors being difficult to be quantified and measured (Shi, 2002). Accordingly, this research also makes an assessment on the strengths and weaknesses of the ten industrial regions for the most beneficial invested markets based on the Invested of Systematic Index (ISRI) and the Rotated Invested of Systematic Risk Index (RISRI) which will produce in fist macroeconomic model (first hypothesis) and second macroeconomic

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Identifying Research Topic

Collecting Related Lecture 1.Outstanding papers and journals regarding research methodology 2.Fundamental concept of portfolio theory 3.Relevant empirical research paper regarding portfolio theory 4.Elemental concept of macroeconomic model 5.Relevant empirical research paper regarding macroeconomic model 6.Review of relevant references Develop and Apply

Measuring Invested Systematic Risk Indexes - Utilizing Factor Analysis to Produce the Effective Macroeconomic Model for Analytical Industrial regions Factor Analysis

Comparison of Invested Systematic Risk among ten industrial regions (USA, Japan, Four Asia Tigers and BRIC)

Macroeconomic Model

Bring the annual growth rate of ICI into CAPM model in order to calculate Beta Priority Numbers of twelve stock markets of ten industrial regions

Portfolio Theory (CAPM) Scenario Analysis & Empirical Analysis

Adjustment
Verification of Analysis and Explanation

Conclusion and Recommendations

Figure 3. Research methodological process.

macroeconomic model (second hypothesis) in this research (Duo et al., 2007). Research methodology In the research framework, the observations and investigations of this research are according to the established insights from the literatures on the portfolio theory and macroeconomic model and the research methodologies to assess high potential of the ten industrial regions of becoming the most profitable invested market. In terms of first step of the statistic measurement, the Principle Component Method of Factor Analysis was utilized to measure and test the first hypothesis (Macroeconomic Model MeasurementCovariance) (Tian and wan, 2004) in order to uncover the solution to the first research question. This step is to take advantage of 5

years of collected data from the ten industrial regions to build competition of marketed market indexes (CMI) based on twenty-five macroeconomic factors. Then, in terms of the second step of statistic measurement, the Principle Component Method - Varimax Method of Factor Analysis was exploited to measure the second hypothesis (Macroeconomic Model Rotation Measurement Correlation) in order to find out the solution to the second and third research questions (Tong, 2003). The measure step is to adjust the ISRI through the rotation method of the collected data. Ultimately, in terms of the third statistic measurement, the third hypothesis (Maximize Return Rate Scenario analysis and empirical analysis) is measured by the scenario analysis and empirical analysis to resolve the final two research questions (Yang et al., 2005). The statistic measurement in this step is to utilize the ISRI annual growth rate to be the market portfolio return rate (Rm), the fluctuated rate of stock index to be the expected return rate of C invested

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portfolio ( E ( Rc ) ) and government bonds rate to be risk-free returned rate of invested objective (capital asset) to put into the CAMP in order to calculate the Beta Priority Numbers (Beta Coefficient) (Fama, 1968) for the analytical twelve stock markets (USA New York, USA NASDAQ, Japan Tokyo, Taiwan, Singapore, Korea, Hong Kong, Brazil, Russia, India, China Shanghai and China Shenzhen) (Graciela et al. 2002) of ten industrial regions including USA, Japan, Taiwan, Singapore, Korea, Hong Kong, Brazil, India, Russia and China. Correspondingly, quantitative statistical methods provided the required evidence for the results in this study (Jao, 2002). The consequence is a grounded, more accomplished and indicative theory of portfolio theory in Figure 3 (Hsieh, 2009).

different theories. As noted in the lecture review of the elemental concept of the portfolio theory, the invested risks are always the key-point to impact the invested portfolio researches of Hicks (1931) and Markowitz (1959). Since Sharpe (1964) created the CAPM model, the invested risks began to be quantified as the named (beta coefficient) and associated with the expected return rate of the C invested portfolio ( E ( Rc ) ), market portfolio return rate of C invested objective ( E ( Rm ) ), and risk-free returned rate of invested objective (capital asset) ( R f ). Further, the invested risks are classified as systematic risk and unsystematic risk. To take the next step, in terms of systematic risk, Stephen (1976) created the APM model that explicitly expressed the systematic risk result from multiple economic factors. In order to decrease or eliminate the systematic risk, it is important to create the most directly efficient mathematical equation to measure the systematic risk for financial and economic researches with a long time horizon. Hence, macroeconomic model is the most compatible for measuring systematic risk due to the analytical economic factors that are considered in the macroeconomic model. Further, through a series of statistic calculation and analysis, the correlation, standard deviation and covariance among measured factors are able to be directly expressed. This is groundbreaking measurement for economic scholars and financial researchers. Therefore, in this research, factor analysis is used as a statistic measurement to create the most effective macroeconomic model. Ultimately, this study utilized scenario analysis and empirical analysis to verify the model. The research theory development framework is expressed in Figure 4. In Figure 4, in terms of research theory, the relationship of the three theories (portfolio theory, macroeconomic model (MEM) and assessment method) in this research are briefly presented through the related lecture review study in detail. The first research theory application of this research is to maximize expected return rates and to minimize systematic risk in the invested objectives and portfolios through utilizing and combining the portfolio theory and macroeconomic model. The second research theory exercise of this research is to verify the macroeconomic model correlation among analytical macroeconomic factors through utilizing and combining the portfolio theory and macroeconomic model. The ultimate research theory practice of this research is to examine the stock market of ten industrial regions in order to verify the macroeconomic model through portfolio theory, through utilizing and combining the macroeconomic model and the assessment method (scenario analysis and empirical analysis).

Research specification of research sample and data collection In terms of the representativeness and correction of the efficient macroeconomic model though factor analysis, the research sample must collectively and statistically constrain all impacted macroeconomic factors as far as possible. Further, the sample in this research contains large and complicated macroeconomic factors that are collected from two authoritative and professional channels (Greenwood and Jovanovic, 1995). One is the official government statistic departments and the other is from the four economic statistics for macroeconomic factors data, including IMD World Competitiveness Yearbook (WCY)-National Competitive Index (NCI), World Economic Forum (WEF)-Global Competitiveness Index (GCI), Business Environment Risk Intelligence (BERI)Business Environment, and Economist Intelligence Unit (EIU) Business Environment. The content of research sample consists of the vertical range and horizontal scope. Specifically, in terms of the validity and reliability of collected data, this study focused on the three important measuring aspects (Hsu and Tang, 2002): (1) Content validity, which was judged subjectively; (2) construct validity, which was examined by factor analysis and (3) reliability, which concluded that the seven measures of quality management have a high degree of criterion-related validity when taken together. Given the sensitive nature of research data, time was devoted to cite the impacted macroeconomic factors of academic institutions (James, 2002). A database of all macroeconomic factors was created using public and primary economic reports including press releases, newspapers, articles, journal articles and analyzing reports. These sources provided a macroeconomic-level understanding of the motivations and objectives, basic challenges, target characteristics, financial market contexts and general sense regarding portfolio theory and macroeconomic model. Otherwise, the economic indicators data includes the annual economic indicators data (leading and lagging indicators) (Joe et al., 2002). The vertical range stretch over five years from 2004 to 2008 and the horizontal scope consists of twelve stock markets (USA New York, USA NASDAQ, Japan Tokyo, Taiwan, Singapore, Korea, Hong Kong, Brazil, Russia, India, China Shanghai and China Shenzhen) of ten industrial regions including USA, Japan, Four Asia Tigers and BRIC. With regard to the analysis method, whichever gains a higher score will be given full marks and other methods are in accordance with relative value to decide who wins the score (James and Kam, 2007). Table 1 utilized these macroeconomic factors as the measure items of analysis (James, 2007).

RESULTS In conclusion, this chapter summarizes the findings and consequences of this thesis research and discusses the studys limitations. The contributions of this research utilize appropriate theories, methods and practices and follow the future direction in the development of researching systematic risk through the portfolio theory and macroeconomic model. Conclusion After the measurement of this research, the five research questions are resolved in detail, which are outstanding findings for global investors who desired to invest in these twelve stock markets from ten industrial regions.

Research theory The fundamental research design in this research is based on combining the portfolio theory and macroeconomic model in order to create the efficient and effective macroeconomic model to measure the beta priority number (beta coefficient) in CAPM. The anticipatory problem is how to combine these two completely

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Table 1. Research sample contents of published data.

Measure Institution Official Government Statistic Department

Measure Items The Economic Growth Rate (%) (EG) - A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. The Gross National Product (GDP) per capital (USD) (GDPPC) - GNP is divided by total national population. The Inflation Rate (consumer prices) (IRCP) This entry furnishes the annual percent change in consumer prices compared with the previous year's consumer prices. The National Imports (Billions, USD) (IP) This entry provides the total US dollar amount of merchandise imports on a c.i.f. (cost, insurance, and freight) or f.o.b. (free on board) basis. These figures are calculated on an exchange rate basis, i.e., not in purchasing power parity (PPP) terms. The National Exports (Billions, USD) (EP) This entry provides the total US dollar amount of merchandise exports on an f.o.b. (free on board) basis. These figures are calculated on an exchange rate basis, that is, not in purchasing power parity (PPP) terms. The GDP (purchasing-power parity) (Billions, USD) (GDPPP) This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nations GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the country. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries. The National Current Account Balance (Billions, USD) (NCAB) This entry records a countrys net trade in goods and services, plus net earnings from rents, interest, profits, and dividends, and net transfer payments (such as pension funds and worker remittances) to and from the rest of the world during the period specified. These figures are calculated on an exchange rate basis, that is, not in purchasing power parity (PPP) terms. The National Reserves of foreign exchange and gold (Billions, USD) (NRFEG) This entry gives the dollar value for the stock of all financial assets that are available to the central monetary authority for use in meeting a countrys balance of payments needs as of the enddate of the period specified. This category includes not only foreign currency and gold, but also a countrys holdings of Special Drawing Rights in the International Monetary Fund, and its reserve position in the Fund. The Investment (gross fixed) of GDP (%) (IPY) - This entry records total business spending on fixed assets, such as factories, machinery, equipment, dwellings, and inventories of raw materials, which provide the basis for future production. It is measured gross of the depreciation of the assets, that is, it includes investments that merely replaces worn-out or scrapped capital. The Industrial production growth rate (%) (IPG) This entry gives the annual percentage increase in industrial production (includes manufacturing, mining, and construction). The Unemployment Rating (%) (UE) - An economic condition marked by the fact that individuals actively seeking jobs remain not hired. Unemployment is expressed as a percentage of the total available work force. The Consumer Price Index (CPI) - An inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The Interest Rate (%) (IR) - A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. The Exchange Rate (ER) The price of one currency expressed in terms of another currency. The Comprehensive Index of Economic Performance from World Competitiveness Yearbook by the International institute for Management Development (IMDCEP) The Comprehensive Index of Business Competitiveness form World Economic Forum (WEFCBC) The Basic Requirements of Global Competitiveness form World Economic Forum (WEFGR) The Efficiency Enhancers of Global Competitiveness form World Economic Forum (WEFGE) The Innovation Factors of Global Competitiveness form World Economic Forum (WEFIF)

IMD World Competitiveness Yearbook (WCY) World Economic Forum ( WEF )

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Table 1. Contd.

Business Environment Risk Intelligence ( BERI )

The Comprehensive Index of Profit Opportunity Recommendation of Global Business Environment Index (BERIPOR) The Operation Risk of Global Business Environment Index (BERIOR) The Policy Risk of Global Business Environment Index (BERIPR) The Exchange Risk of Global Business Environment Index (BERIER)

Economist Intelligence Unit ( The Comprehensive Index of Business e-readiness Environment from Economist Intelligence Unit (EIUER) EIU )

Portfolio Theory (Efficient Portfolio) (Harry Markowitz, 1959) Fundamental Investment Concept of Dispersing the Investment Risk (John R. Hicks, 1931)

Efficient Portfolio (CAPM & SIM) (William Sharpe (1963) Arbitrage Pricing Model (Stephen Ross, 1976)

Portfolio Theory
Examine the stock market of ten industrial regions in order to verify the macroeconomic model through portfolio theory

Related Lecture Review

Maximize expected returns and minimize systematic risks

Related Lecture Review

The most Beneficial Invested Market Macroeconomic Model (MEM)

Verify the macroeconomic model correlation among analytical macroeconomic factors

Assessment Method

Marcoeconometic Model (Bautista (1988) and Capros et al., 1990)

Related Lecture Review

Scenario Analysis

Empirical Analysis

Figure 4. Research theory development framework.

Further, global investors are able to forecast the variation of fluctuating systematic risk by measuring the ISRI and RISRI through the combined utilization of CAPM ( E ( RStock ) = R f + Stock E ( RMin ) R f ), macroeconomic

inaccuracy is given and constant. Invested Systematic Risk Index (Competition of invested financial markets) (df) = Academic Economic Institute Score Factor + Economic Production Factor + Economic Trade Factor + Economic Exchange Rate Factor + Economic Interest Rate Factor + Economic Consumer Price +e (formula inaccuracy) = (WEFCBC, WEFGE, BERIFOR, BERIOR, GDPPC, EIUER, WEFGR, BERIPR, WEFIF, IMDCEP and BERIER) + (IPY, NRFEG and IPG) + (GDPPP, IP and EP) + (ER) + (IR) + (CPI) +e (formula inaccuracy)

model and rotated macroeconomic model. In this research, the invested systematic risk index (ISRI, first hypothesis) and the rotated invested systematic risk index (RISRI, second hypothesis) of the ten industrial regions are obviously measured which created the related macroeconomic model (1) and rotated macroeconomic model (2) as expressed: Assumption: All collected data are correct and the formula

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=0.957*WEFCBC+0.951*WEFGE+0.913*BERIFOR+0.89 8*BERIOR+0.891*GDPPC+0.882*EIUER+0.881*WEFGR +0.881*BERIPR+0.868*WEFIF+0.833*IMDCEP+0.778* BERIER+0.857*IPY+0.792*NRFEG+0.729*IPG +0.954*GDPPP+0.852*IP+0.677*EP+0.807*ER+0.456*IR +0.527 *CPI+ e (formula inaccuracy) (1) i. The Gross National Product (GDP) per capital (USD) (GDPPC). ii. The National Imports (Billions, USD) (IP). iii. The National Exports (Billions, USD) (EP). iv. The GDP (purchasing-power parity) (Billions, USD) (GDPPP). v. The National Reserves of foreign exchange and gold (Billions, USD) (NRFEG). vi. The Investment (gross fixed) of GDP (%) (IPY). vii. The Industrial production growth rate (%) (IPG). viii. The Consumer Price Index (CPI). ix. The Interest Rate (%) (IR). x. The Exchange Rate (ER). xi. The Comprehensive Index of Economic Performance from World Competitiveness Yearbook by the International Institute for Management Development (IMDCEP). xii. The Comprehensive Index of Business Competitiveness form World Economic Forum (WEFCBC). xiii. The Basic Requirements of Global Competitiveness form World Economic Forum (WEFGR). xiv. The Efficiency Enhancers of Global Competitiveness form World Economic Forum (WEFGE). xv. The Innovation Factors of Global Competitiveness form World Economic Forum (WEFIF). xvi. The Comprehensive Index of Profit Opportunity Recommendation of Global Business Environment Index (BERIPOR). xvii. The Operation Risk of Global Business Environment Index (BERIOR). xviii. The Policy Risk of Global Business Environment Index (BERIPR). xix. The Exchange Risk of Global Business Environment Index (BERIER). xx. The Comprehensive Index of Business e-readiness Environment from Economist Intelligence Unit (EIUER).

WEFGR, GDPPC, EIUER, IMDCEP, BERIER and WEFIF) + (GDPPP, IP and EP) + (IPY, IPG and EG) + (NRFEG) + (CPI) + (ER) +e (formula inaccuracy) =0.954*BERIFOR+0.931*BERIPR+0.908*BERIOR+0.893 *WEFCBC+0.886*WEFGE+0.861*WEFGR+0.843* GDPPC+0.835*EIUER+0.799*IMDCEP+0.796*WEFIF+0. 778*BERIER+0.959*GDPPP+0.984*IP+0.688*EP+0.889* IPG+0.948*IP+0.751*EG+0.91*NRFEG+0.884*CPI+ 0.972*ER +e(formula inaccuracy) (2) i. The Economic Growth Rate (%) (EG). ii. The Gross National Product (GDP) per capital (USD) (GDPPC). iii. The National Imports (Billions, USD) (IP). iv. The National Exports (Billions, USD) (EP). v. The GDP (purchasing-power parity) (Billions, USD) (GDPPP). vi. The National Reserves of foreign exchange and gold (Billions, USD) (NRFEG). vii. The Investment (gross fixed) of GDP (%) (IPY). viii. The Industrial production growth rate (%) (IPG). ix. The Consumer Price Index (CPI). x. The Exchange Rate (ER). xi. The Comprehensive Index of Economic Performance from World Competitiveness Yearbook by the International institute for Management Development (IMDCEP). xii. The Comprehensive Index of Business Competitiveness form World Economic Forum (WEFCBC). xiii. The Basic Requirements of Global Competitiveness form World Economic Forum (WEFGR). xix. The Efficiency Enhancers of Global Competitiveness form World Economic Forum (WEFGE). xx. The Innovation Factors of Global Competitiveness form World Economic Forum (WEFIF). xxi. The Comprehensive Index of Profit Opportunity Recommendation of Global Business Environment Index (BERIPOR). xxii. The Operation Risk of Global Business Environment Index (BERIOR). xxiii. The Policy Risk of Global Business Environment Index (BERIPR). xxiv. The Exchange Risk of Global Business Environment Index (BERIER). xxv. The Comprehensive Index of Business e-readiness Environment from Economist Intelligence Unit (EIUER). Hence, the Invested Systematic Risk Index (ISRI), the Rotated Invested Systematic Risk Index RISRI, the Growth Rating of the Invested Systematic Risk Index, and the Growth Rating of the Rotated Invested Systematic Risk Index of each of the ten industrial regions are presented in Table 2. To take the further step, the five-year beta priority numbers of the twelve stock markets (USA New York, USA NASDAQ, Japan, Taiwan, Singapore, Korea, Hong Kong, Brazil, Russia, India,

Assumption: All collected data are correct and the formula inaccuracy is given and constant. Rotated Invested Systematic Risk Index (Competition of invested financial markets) (df) = Academic Economic Institute Score Factor + E Economic Trade Factor + Economic Profit Factor + Economic Reserves Factor + Economic Consumer Price Index Factor + Economic Exchange Rate Factor = (BERIFOR, BERIPR, BERIOR, WEFCBC, WEFGE,

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Table 2. The Invested systematic risk index of the related macroeconomic model (1) and rotated macroeconomic model (2) of factor analysis from 2004 to 2008.

USA 2004 USA 2005 USA 2006 USA 2007 USA 2008 JAPAN 2004 JAPAN 2005 JAPAN 2006 JAPAN 2007 JAPAN 2008 TAIWAN 2004 TAIWAN 2005 TAIWAN 2006 TAIWAN 2007 TAIWAN 2008 SINGAPORE 2004 SINGAPORE 2005 SINGAPORE 2006 SINGAPORE 2007 SINGAPORE 2008 KOREA 2004 KOREA 2005 KOREA 2006 KOREA 2007 KOREA 2008 HONG KONG 2004 HONG KONG 2005 HONG KONG 2006 HONG KONG 2007 HONG KONG 2008 BRAZIL 2004 BRAZIL 2005 BRAZIL 2006 BRAZIL 2007

Invested systematic risk index of the related macroeconomic model (1) 47939.05 50829.85 53582.36 55452.83 57553.24 30578.81 32269.18 34259 35928.98 37330.76 22895.45 24564.83 26429.42 28424.24 29692.29 36420.57 39479.08 42671.31 45346.12 47350.66 20210.04 21547.26 23266.19 24958.46 26395.33 29752.28 32750.99 35714.21 38808.21 40751.45 8456.545 9044.654 9296.606 9921.351

Rotated invested systematic risk index of the related macroeconomic model (1) 47452.32 50476.59 53399.25 55332.69 57523.32 29678.99 31352.22 33336.81 35016.01 36426.45 21885.17 23524.94 25309.2 27234.41 28442.72 34631.95 37566.93 40631.67 43236.08 45142.68 19636.25 20934.21 22606.01 24273.97 25685.36 28453.7 31345.82 34170.09 37158.84 39027.63 8129.662 8707.226 8964.129 9582.526

Growth rating of invested Growth rating of rotated invested systematic risk index of the related systematic risk index of the related macroeconomic model (%) (1) macroeconomic model (%) (1) 5.69 5.99 5.69 5.99 5.14 5.47 3.37 3.49 3.65 3.81 5.24 5.34 5.24 5.34 5.81 5.95 4.65 4.80 3.76 3.87 6.80 6.97 6.80 6.97 7.05 7.05 7.02 7.07 4.27 4.25 7.75 7.81 7.75 7.81 7.48 7.54 5.90 6.02 4.23 4.22 6.21 6.20 6.21 6.20 7.39 7.40 6.78 6.87 5.44 5.49 9.16 9.23 9.16 9.23 8.30 8.27 7.97 8.04 4.77 4.79 6.50 6.63 6.50 6.63 2.71 2.87 6.30 6.45

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Table 2. Contd.

BRAZIL 2008 RUSSIA 2004 RUSSIA 2005 RUSSIA 2006 RUSSIA 2007 RUSSIA 2008 INDIA 2004 INDIA 2005 INDIA 2006 INDIA 2007 INDIA 2008 CHINA 2004 CHINA 2005 CHINA 2006 CHINA 2007 CHINA 2008
Source: SPSS Data Analysis.

11010.61 11265.09 12433.47 13918.89 15635.57 17398.09 5955.555 6448.421 7086.197 8015.897 6055.779 10686.48 12260.32 14676.83 16902.61 15107.45

10675.02 10840.45 11980.63 13445.71 15157.75 16928.12 5917.939 6418.842 7069.151 8065.254 6207.333 11005.24 12748 15261.61 17641.32 16007.7

9.89 9.40 9.40 10.67 10.98 10.13 7.64 7.64 9.00 11.60 -32.37 12.84 12.84 16.46 13.17 -11.88

10.23 9.52 9.52 10.90 11.29 10.46 7.80 7.80 9.20 12.35 -29.93 13.67 13.67 16.47 13.49 -10.21

China Shanghai and China Shenzhen) were taken from the ten industrial regions (USA, Japan, Taiwan, Singapore, Korea, Hong Kong, Brazil, Russia, India and China) through CAPM ( E ( RStock )

= R f + Stock E ( RMin ) R f )

(Kindleberger, 1972) of portfolio theory and macroeconomic model (1) and rotated macroeconomic model (2) as detailed in earlier. RESEARCH LIMITATIONS Despite the measuring significance of all the consequences, this study comes with some research limitations as expected (Chuang and Hsu, 2003). The most apparent of these limitations is the generalization of the findings. The sample consisted of 5 years of economic

indicators data for the ten industrial regions from 2004 to 2008 with related macroeconomic factors. Further, these macroeconomic factors were collected from the official government statistic departments and four main academic economic institutions: IMD World Competitiveness Indexes (WCY); World Economic Forum Indexes (WEF); Business Environment Risk Intelligence (BERI); and Business Information Unit (BIU). For all that, the conclusions of this research are not able to take into entire consideration other macroeconomic sectors (for example, political, legal, technology) (Chien, 2002). This will require additional data collection, greater discussion and further investigation. The related limitations are listed: 1. Initially, this research focuses on the portfolio theory so that the fundamental assumption and designed methodology of this research is developed

using the basic research content of portfolio theory (King and Ross, 1993). 2. Based on the portfolio theory and related financial investment researches, the risks are categorized by two kinds of risks. One is systematic risk and the other is unsystematic risk. However, there are still some potential risks that cannot be measured but in this research, these risks are not addressed (Desheng, 2007). 3. In terms of unsystematic risk priority, the unsystematic risk is able to be diversifiable through comprehensive effective invested portfolio strategies. However, this research did not discuss and verify what is the best effective invested portfolio strategies, due to the invested objectives which are different characteristics, including cash, checking, securities, fund, options, future market and others invested objectives. Therefore, in order not to be deviation of this research, the unsystematic

Hsieh et al.

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priority number is given through scenario analysis and empirical analysis (De Sheng, 2007). 4. Further, there is a little impact of unavoidable potential risk be included in the unsystematic market that is not discussed in this research. For example, the investors preference is the one critical impact of unsystematic risk priority number due to the assumption of portfolio theory is based on that all investors pursue the maximum return rate (Kuznets, 1995). Therefore, in order not to be deviation of this research, the unsystematic priority number is given through scenario analysis and empirical analysis. 5. Moreover, this research centralizes on macroeconomic environment and market. The impacts of accounting and financial factors of invested objectives are not covered in this research (Liu, 2001). For example, accounting return on assets (ROA), accounting return on equity (ROE), cash-flow return rate, internal rate of return (IRR), etc. 6. This research does not do any investigation and study regarding the impact of policy, even though there is close and related dependency between economy and policy through the a few factors in the macroeconomic model of this research (Lin, 2001), there is no directly or strongly positive indicators to represent the characteristics of a policy to be a variance or indicator. 7. This research focuses on the ten selected industrial regions including two global developed economic entities (United of States and Japan), one global developing economic entity four Asia tigers (Hong Kong, South Korea, Singapore, and Taiwan) and one highly industrialized and emerging economic entities (Brazil, Russia, India and China). Hence, this does not discuss worldwide industrial regions. Also, due to the shortcomings of previous literature pertinent to create effective macroeconomic model into portfolio theory introducing a complete indicator of estimation, this research has not concluded the entire worldwide economy macroeconomic model (Martin, 2001). 8. The collected data is from 2004 to 2008 which only cover the first financial crisis year in 2008 (Maxwell, 1995). The objective macroeconomic factors are supposed to be affected by financial crisis (McKinnon, 1973). The macroeconomic factors in this research may be not able to deeply and widely discuss the impact of implied volatility of financial crisis (McKinnon, 2001). The resolution of barrier on this research limitation depends on the further larger research data in the future. An eventual caveat is that the consequences are depended on data collected retrospectively (Rao et al., 2009). The utilization of sources mitigates this problem to a larger extent, but inaccuracies are not to be rule out completely and totally. RESEARCH CONTRIBUTION Notwithstanding its limitations, this thesis is on reducing

the invested systematic risk in twelve stock markets from ten industrial regions through portfolio theory and macroeconomic model makes some contributions to the literature and future direction. Further, looking back, this research used an integration of three kinds of research fields, Macroeconomic Model Measurement Covariance, Macroeconomic Model Rotation Measurement Correlation and Maximize Return Rate Scenario Analysis and Empirical Analysis, across ten industrial regions (USA, Japan, Taiwan, Singapore, Korea, Hong Kong, Brazil, Russia, India and China) by analyzing five-year beta priority numbers (beta coefficients) of twelve stock markets (USA New York, USA NASQAQ, Japan Tokyo, Taiwan, Singapore, Korea, Hong Kong, Brazil, Russia, India, China Shanghai and China Shenzhen) from 2004 to 2008. Besides the theoretical contributions, this study also offered methodological insights and visions. Fundamentally, the work provides an example of how such research could combine the depth of development conduct of portfolio theory and macroeconomic with the quantitative analytical power of sufficiently large sample size of macroeconomic indicators data. Most of the past work on systematic risk has pursued qualitative discussion, explanation and investigation at macroeconomic and microeconomic environment level. Further, this thesis is one of the few to offer operational measures of performance to the portfolio theory and macroeconomic model literature among ten industrial regions, documenting actual value creation, compared to the majority of work out there. Finally, this thesis introduces a way to empirically apply the study of dependent research.
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