| Summary: | Shareholder wealth creation is a topic taught in MBA programmes.
This paper documents the development of a share selection framework in order to
construct an alpha portfolio within the general mining sector of the JSE limited.
The relationship between fundamental analysis indicators, such as book value per
share, earnings per share and intrinsic value, and the average annual share price is
determined in order to build a linear regression model. The model is applied to the
general mining sector to test its effectiveness. Criteria are set for each indicator to
identify companies from this sector for inclusion in the final portfolio.
A portfolio’s risk is determined by the proportions of the individual securities, their
variances, and their co-variances. Markowitz (1952) quantitatively demonstrated the
benefits of diversification in order to reduce risk (volatility) and increase return. This
theory was put to the test by comparing individual shares’ average volatilities against
the diversified portfolio’s average volatilities for similar and/or improved returns.
A weighted average portfolio, with the lowest standard deviation, consisting of four
shares identified from the selection framework, was constructed. The portfolio’s
average annual growth rate was benchmarked against the JSE All Share Index
average annual growth rate to evaluate returns over a ten year period. The research
hypothesis, namely shareholder wealth creation in an alpha portfolio, was reached:
the final portfolio outperformed the JSE All Share Index annual growth rate in seven
out of the ten evaluated years. === Thesis (MBA)--North-West University, Potchefstroom Campus, 2012
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