Florin Aliu

Tomas Bata University in Zlín

Zlín, Czech Republic

aliu@utb.cz

Portfolio risk-return analysis: The case of the automotive industry in the Czech Republic

Drahomira Pavelkova

Tomas Bata University in Zlín

Zlín, Czech Republic

pavelkova@utb.cz

Bruce Dehning

Chapman University

Orange, USA, California

bdehning@chapman.edu

Abstract. Risk has always been the concern of managers and shareholders as a part of decision-making processes. Managers tend to control unsystematic risk mostly while trying to minimize the exposure to systematic (market) risk. The paper aims to assess the risk level and risk-return tradeoffs for the companies operating in Czech automotive industry. A diversification formula and calculation of returns using return-on-equity were employed on the yearly basis from 2005 till 2014. The returns and risk calculations were conducted on the portfolio of auto manufacturers, followed by the portfolio of auto suppliers, while the third one was performed for suppliers and manufacturers taken together. The results of the study show that the average correlation coefficient tends to decrease when we move from manufacturers to suppliers, while increasing when we join manufacturers and suppliers in one portfolio. The highest diversification benefit has been reached in the portfolio of auto suppliers. The highest risk is manifested for the portfolio of manufacturers, while the lowest – in the portfolio of auto suppliers. Risk level declined when we joined manufacturers and suppliers in comparison with risk of manufacturers alone. However, the lowest risk and the highest risk-return tradeoff were achieved in the portfolio of suppliers.

Received: June, 2017

1st Revision: August, 2017

Accepted: November, 2017

DOI: 10.14254/2071-8330.2017/10-4/5

JEL Classification: E32, F21, G32

Keywords: portfolio theory, portfolio diversification, risk-return analysis, automotive industry