Stock and Structured Warrant Portfolio Optimization Using Black-Litterman Model and Binomial Method

Abstract

In recent years, the number of Indonesian investors has rapidly increased during the COVID-19 pandemic which happened all around the world. There have been a massive number of influencers in social media who were promoting investment. Although stocks and warrants are interesting choices, mutual funds still become the main ones for beginners. Therefore, this research focuses on the development of a stock portfolio model using the Black-Litterman method which involves the investor’s views towards the stock returns. The research refers to one of the largest equity funds in Indonesia, that is Sucorinvest Equity Fund, by using the top ten of its stocks that are majority in the fund (as of April 28, 2023). Furthermore, this research also constructs a structured warrant portfolio, but it is separated from the initially constructed stock portfolio. Structured warrants could be an appropriate choice for low-budget investors. It was newly introduced in Indonesia in September 2022 so it is interesting to be observed. Based on the results and the implemented assumptions, the return obtained from the stock portfolio is superior to the observed fund’s return. Meanwhile, call structured warrant portfolio using the existing product in the market yields a negative return, because the exercise price and warrant offered price were too high. Thus, structured warrants could be considered overpriced at the moment, so the chance of obtaining profit is extremely small. Due to its similar properties to call and put options, we propose the warrant pricing and use it in simulations, so in the future, structured warrants may become an attractive instrument for the investors.