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Theory And Literature Review

Theory And Literature Review

Theory And Literature Review


Risk usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Jones in his book (2002; p133) said from the types of risk divided into:

  • Systematic Risk

Systematic (Market) Risk is variability in a security’s total returns that is directly associated with overallmovements in the general market or economy.

Virtually all securities have some systematic risk, wheter bonds or stocks, because systematic risk encompasses interest rate, market and inflation risks. The investor cannot escape this part of the risk because no matter investor doing diversifies the risk of the overall market cannot be avoided.

  • Nonsystematic Risk

Nonsystematic risk is variability in a security’s total returns not related  to  overall  market  variability. This  risk  is  unique  to  a particular security and is associated with such factors as business risk, financial risk and also liquidity risk.

Although  all  securities  tend  to  have  nonsytematic  risk,  it  is mgenerally connected with commonstocks.


According to, Stock price index is an indicator which shows the stock price movement.Index has a function as a market trend indicator, the index movement describes a market condition on acertain time whether the market in active or passive.

Types of indices in Indonesian stock Exchange are:

  • IndividualIndex uses the price index of each stock to base price or each stock index that listed in Indonesian Stock Exchange.
  • Sectored StockPrice Index uses all stocks included in each sectors (Agricultures, Basic Industries,Consumptions, Differs Industries, Finances,  Infrastructures,  Mining,  Properties,  Trading  Services and Manufactures).
  • Composite Stock  Price  Index  uses  all  listed  stocks  as  as component of index calculation.
  • LQ45Index consists of 45 stocks with criteria applied. Those criteria are:

o Included  in  top  60  companies  with  the  highest  market capitalization in the last 12 months

o Included  in  the  top  60  companies  with  the  highest transaction value in a regular market in the last 12 months.

o Have been listed in Indonesian Stock Exchange at least 3 months.

o Having good financial conditions, prospect of growth and high transaction value and frequency.

  • JakartaIslamic Index consists of 30 stocks accommodates Islamic Investment  Law.  Stocks  with  below  criteria  are  excluded  in Jakarta Islamic Index; the criteria are:

o Business  or  gaming  with  associated  in  gambling  or restricted trading.

o Interest Profit financial institution.

o Business with produces distributes and trades food and beverage against the Islamic Law.

o Business related with produces distributes and/or provides product or services with no respect ofmoral or ruins intellect.

  • BlueChip and Expansion Index, stock price index exclusively bases on the group of stocks listedin Indonesian Stock Exchange.
  • Kompas100 Index,  stock  price  index  with  the  incorporated  of Indonesian    Stock   Exchange  and   Kompas   newspaper   with conditions as follow:

o Listed in Indonesian Stock Exchange at least 3 months.

o Included in Composite Index (IHSG).

o Bases  on  the  consideration  of  company’s  fundamental factor and pattern of stocks trading.

o Includes in 150 stocks with biggest transaction value and frequency in regular market for the last 12months.

o The process as follows:

 Top  60  from  the  150  selected  stocks  with  the largest transaction value will entered in the calculation of Kompas100.

 Acquire 75 stocks out of 90 stocks based on regular transactions in the market.

 Acquire   60   from   75   based   on   frequency   of transactions in the market.

 Select   40   stocks   from   60   based   on   market capitalization.


The covariance is a measure of the strength of the relationship between two discrete random variables,X and Y. Levine, Stephan, Krehbiel and Berenson explained that a positive covariance indicates apositive relationship. A negative covariance indicates a negative relationship and covariance of 0indicates that the two variables are independent (2008; p184).