The capital represents one of the development factors of the national economy. Considering its limitation, however, permanent efforts have been made, both in the theory and practice, to find new ways (instruments) to provide the capital needed for achieving the development goals of the corporations, and indirectly, of the national economy. Thus, various types of securities have emerged as a source of capital, on the one hand, and as an investment instrument, on the other, by which the corporations make fructification of their capital by investing in the other corporations, national and international –wide. Taking into account the complex nature of the securities, the capital fructification by investing in the certain security portfolio requires extensive analysis in order to determine optimal relation between return and risk, two major components in the process of analysis and estimation of the efficacy of such investments. The specific character of such types of assets is not only a result of the existing various kinds of assets that are available to the investors, but also as a result of the fact that the analysis and estimate of the efficacy of such investment performs in portfolio context. So, when we talk for the financial assets (investments) we are considering the certain portfolio (set of certain types and number of securities).Financial assets; Financial investments; Efficiency at financial investments

Diana Boskovska

English

Research Papers in Economics

AE  Interferenţe economice 
 
Amfiteatru Economic  34 
 
FINANCIAL ASSETS AND THEIR EFFICACY 
(Activele financiare şi eficacitatea lor) 
 
M. Sc. Boskovska Diana  
 
 
 
 
Abstract 
 
The capital represents one of the 
development factors of the national 
economy.  Considering its limitation, 
however,  permanent efforts have been 
made, both in the theory and practice, to 
find new ways (instruments) to provide the 
capital needed for achieving the 
development goals of the corporations, and  
indirectly, of the national economy. Thus, 
various types of securities have emerged as 
a source of capital, on the one hand, and as 
an investment instrument, on the other, by 
which the corporations make fructification 
of their capital by investing in the other 
corporations, national and international –
wide. Taking into account the complex 
nature of the securities, the capital 
fructification by investing in the certain 
security portfolio requires extensive 
analysis in order to determine optimal 
relation between return and risk, two major 
components in the process of analysis and 
estimation of the efficacy of such 
investments. 
The specific character of such types 
of  assets is not only a result of the existing 
various kinds of assets that  are available to 
the investors, but also as  a result of the fact 
that  the analysis and estimate of the 
efficacy of such investment performs in 
portfolio context. So, when we talk for the 
financial assets (investments) we are 
considering the certain portfolio (set of 
certain types and number of securities). 
 
Keywords: ●Financial assets ●Financial 
investments ●Efficiency at financial 
investments ●Return and risk ●Securities 
portfolio 
      Rezumat 
 
Capitalul reprezintă unul dintre 
factorii dezvoltării economiei naţionale. 
Luând în considerare faptul că este limitat, 
s-au facut totusi eforturi permanente , atât 
în teorie cât şi în practică, pentru găsirea de 
noi modalităţi de a furniza capitalul necesar 
pentru îndeplinirea scopurilor de dezvoltare 
a corporaţiilor,  şi indirect, a economiei 
naţionale. Astfel, au apărut variate tipuri de 
bonuri de tezaur ca sursă de capital pe de o 
parte, şi ca un instrument de investire pe de 
altă parte, prin intermediul cărora 
corporaţiile fructifică propriul capital 
investind în alte corporaţii naţionale sau 
internaţionale.  
Luând în considerare natura 
complexă a acestor titluri, fructificarea 
capitalului prin investirea în anumite 
portofolii de titluri necesită analize extinse 
pentru a determina relaţia optimă dintre 
profit şi risc, două componente majore în 
procesul analizei şi estimarea eficienţei 
acestor investiţii. 
Caracteristica specifică acestor 
tipuri de investiţii nu reprezintă doar un 
rezultat al existenţei variatelor tipuri de 
bunuri disponibile pentru investitori, dar 
este de asemenea un rezultat al faptului ca 
analiza  şi estimarea eficienţei acestor 
investiţii se realizează în contextul 
portofoliului. Aşadar, când vorbim de 
bunuri financiare (investiţii) luăm în 
considerare respectivul portofoliu (set de 
anumite tipuri si număr de titluri) 
 
Cuvinte cheie: ●Bunuri financiare 
●Investiţii financiare ●Eficienţa 
investiţiilor financiare ●Riscul recuperării 
●Portofoliu de titluri. 
Assistant researcher Institute of Economics-Skopje 
Republic of Macedonia 
diana@ek-inst.ukim.edu.mk AE  Economic Interferences 
 
Nr. 21● Februarie 2007  35
Introduction 
 
The integration of Republic of 
Macedonia into European and worldwide 
international community seeks a lot of 
changes that is necessary to be done. So, 
one of such changes presents, the need 
for greater and permanent development 
of the capital market. Such need is more 
stress in regard of the low degree of 
development of Macedonian economy 
until now.   
In the developed world, along the 
usage of the capital by the internal 
sources and commercial credits by the 
banks for the longer period is established 
the practice to use another financial 
instrument as a source of capital: various 
types of securities (stocks, bonds, etc.), 
leasing, franchising and etc. 
The benefit of the usage of such 
financial instruments is double. First it 
provides additional capital and second, it 
gives opportunity to entrance of the 
foreign capital into economy through 
portfolio investments, foreign direct 
investments, join venture etc., that able a 
lot of advantages for the economy.  
Success of the development 
process of the capital market is not only 
determined by its institutional 
component, but also by the degree of the 
information of the investors (individual 
or institutional) for the alternative types 
of the capital sources from one side, and 
for the alternative ways of investments of 
the free cash flow from the other side, in 
order to realize the additional benefit. 
Relatively, the short period of existing 
the Macedonian stock exchange, not 
existing the investment analysts, 
domestic investment fund etc. presents 
other factors that influence the current 
trends on the capital market. So, 
Macedonian national economy has 
created the situation in which the 
development level of capital market 
doesn’t satisfy in accord to other 
countries in the region. This conclusion 
comes out from the data for the 
allocation of the free money in the 
national economy. Namely, according to 
the unofficial sources from 3 to 5 % from 
the free money in the national economy 
is invested in stocks, shares and 
insurance funds on one side, but on the 
other side 95 % of it is in the banking 
sector. For comparison, in the countries 
of Central and East Europe the tendency 
of the allocation is contrary to this. In 
these countries around 75 % of the free 
money is in deposit, while 25 % is 
allocated on the capital market in stocks, 
shares, bonds, investment, pension and 
insurance funds with tendency to 
increase to 50 % that is case in western 
European countries. Even in USA this 
percentage is greater.    
So the subject of research in this 
article is to improve this situation, 
considering the securities above all.  
 
1. Securities, their need  
and significance 
 
The basic purpose of the 
individual and the corporation is their 
own growth and development that leads 
consequently to development of the 
national economy as well as of the whole 
society. The growth and development of 
the subjects are determined by nume 
rous factors, but they can only 
realize throughout investments. But 
investments of oneself present complex 
category that need to be defined clearly 
and precisely. In the theory in the first 
time, the investments were defined only 
from the aspect of the process of creating 
the material goods. But, later this 
definition is widening, with the long 
financial investments that contain long-
term credits and long–term securities 
issued by other subjects. 
In the financial theory the 
securities have double character. From AE  Interferenţe economice 
 
Amfiteatru Economic  36 
 
one side they present sources to finance 
the investment activity, but for the other 
side appear as investment instrument or 
alterative to increase the capital 
regardless the type of the subject 
(physical or legal). 
Talking for Macedonia, the need 
and significant of the securities is more 
stress considering the economic changes 
occurred in the last decade of the 20-th 
century in the countries of  Southeast 
Europe. Also, such changes mean 
function of the capital market, that have 
required, require and will require 
permanent conceptualization of the 
capital market in each aspects: 
conceptualization of the legal regulative 
in this area, establishing investment 
(financial) instruments approved with 
their efficiency on the international 
capital market as well as implementation 
of the net of institutional subjects needed 
for the proper function of the capital 
market.   
Also, in this direction the 
Macedonian Stock Exchange was in 
1995 as an institution. At the beginning it 
worked as stock company on nonprofit 
base, but with the changes in the Law of 
securities in 2001 it has started to work 
as a profit company. As stock holders 
could be foreign and domestic legal and 
physical subjects, but the share of the 
single stock holder is limited to 10 % of 
the initial share capital of the Stock (the 
initial capital is 500.000 euros (1).    
The investments present very 
complex category regardless of the type 
of investments-real or financial 
investments. Such complex character of 
the financial investments or investments 
in securities that are subject of a trade, 
first of all is result of existing the various 
kind and semi kind securities that 
distinguish among them about their 
profitability and riskness. Also it is 
necessary to mention that such type of 
investments above all present investment 
in portfolio context with one and only 
reason to decrease volatility and riskness 
of the investment.  Namely, with 
combining the different types of 
securities in accord with relation between 
return and risk, attempts to maximize the 
return to the certain level of risk or to 
minimize the risk to the certain level of 
return.  
 
2. The return and risk  
of the securities 
 
With the appearance of the article 
“Portfolio Selection” by Harry 
Markowitz (2) in 1952 in the financial 
theory and practice and in these frames 
also in the area of investment theory has 
originated new era. 
Before the appearance of the new 
concept, the decision for including 
certain type of security in the portfolio is 
brought on the base of its performances 
(return-risk) that were realized through 
the analysis of the financial working of 
the company that issued the certain 
security, analysis of its financial reports 
and dividend policy. But, contrary to 
such concept, with the appearance of the 
modern portfolio theory, the construction 
of the portfolio is based on the fact that 
including the certain security the 
portfolio it would be in accordance with 
the expected rate of return and the 
standard deviation of the whole 
portfolio.  Namely, from the portfolio 
point of view, for the investors are not 
important movements of the separated 
securities, but the rate of return and risk 
in portfolio context. ”Logically to this, 
the risk and return of the individual 
security should be analyzed in 
accordance with its certain influence to 
the risk and return of the portfolio in 
which it is contended”. (3) 
The portfolio return is 
calculated as the mean value in absolute 
or relative value. At the same time, the AE  Economic Interferences 
 
Nr. 21● Februarie 2007  37
mean value of return of the investment is 
calculated as arithmetic and geometric 
mean value. But in the practice and 
theory is often used the relative value of 
return (required rate of return) calculated 
as arithmetic mean value.  
The expected portfolio rate of 
return E (Rport)  presents weighted 
arithmetic mean of the expected rate of 
return of the separated assets in the 
portfolio (4), where as a weight appears 
the share of the separated assets in the 
total portfolio invested value.   
Mathematically it would be presented in 
this way: 
 
∑
=
=
n
i
Ri WiE Rport E
1
) ( ) (  (1) 
 
-  E (Rport)- expected portfolio rate 
of return; 
-  E(Ri) – expected rate of return of 
the separated securities; 
-  Wi - weigh of the separated 
securities in the portfolio; 
-  n  -  total number of assets 
(securities) in the portfolio. 
 
So, it should be noticed that 
shares of separated assets present ratio 
from invested value in certain asset 
(security) and total value of portfolio, so 
that their total should be 1. 
Considering the risk there are few 
alternative measures. The most popular 
measure for risk in the theory and 
practice presents the standard deviation 
(or variance) (5) as a statistical measure 
for dispersion of the rate of return around 
the expected value. In addition, how 
much its value is higher, the dispersion 
of the expected rates will be higher, too, 
that in same time it would be a higher 
volatility to realize the future returns.  
Generally, diversification of 
portfolio bears lower risk for realization 
of the planed (expected) return. That 
resulting from the fact that the separated 
securities in certain portfolio are in 
internal correlation. So it would be 
possible to conclude that the portfolio 
riskness appears also as a function of the 
degree of correlation that exists among 
separated securities, that is measured 
with the correlation coefficient. The 
correlation coefficient r moves in rang 
from –1 to +1. (6) But, exciting of 
extreme cases +1 or –1 first of all are 
possible only in theoretical sense. 
Contrary, in the practice such coefficient 
has positive value, but less then +1. For 
instance, for stocks, it moves in the range 
from +0.5 to 0.7  
The standard deviation of 
portfolio is calculated according to this 
formula:  
 
∑∑ ∑
== =
+ =
n
i
n
j
n
i
wiwjCovij i wi port
11 1
2 2σ σ  (2) 
 
where: 
-  σport- standard deviation of 
portfolio; 
-  σi-standard deviation of security i; 
-  Covij- covariance of portfolio. 
 
So, from the formula for the 
standard deviation of the portfolio it 
would be possible to come out the same 
conclusion, that for the calculation of the 
standard deviation of the portfolio is not 
enough to know only the standard 
deviations of the separated securities 
contended in the portfolio, but also the 
degree of their mutual connection, 
exactly the correlation coefficient r.  The 
influence of the correlation coefficient to 
portfolio riskness is contended thorough 
the covariance that calculates 
mathematically with the formula: 
Cov= rijσiσj     (3) 
 
where  rij is a correlation coefficient 
between securities i and j.  AE  Interferenţe economice 
 
Amfiteatru Economic  38 
 
As it is possible to see from the 
equation , the covariance is determined 
by the value of the standard deviation of 
the separated securities contended in the 
portfolio and by the correlation 
coefficient that indicates the  movement 
direction of the rates of return of the 
separated securities and the degree of the 
mutual determination or independence of 
the rates of return.  Such determination 
available in the cases of height values of 
the standard deviation for the securities 
contended in the portfolio, because of the 
low value of the correlation coefficient, 
the portfolio riskness to be low, 
relatively.    
In the financial theory there is 
rule that the diversification, or increase 
the number of the securities in portfolio 
reduces the portfolio risk. But, from the 
point of investor’s economic logic comes 
out as a conclusion that every 
diversification is not the efficiency 
maximally, considering the degree of the 
mutual determination of the separated 
assets. The diversification with the 
positive value of the correlation degree, 
but which in the same time available as 
much as possible its lower value from +1 
would be more economically efficiency.  
Consequently, comes out when investor 
planning the financial investments, 
should be taken in consideration own 
free money to allocate in different 
industries in the national economy, as 
well as outside of it, in order to achieve 
as much as possible lower value of the 
correlation coefficient.     
 
Conclusion 
 
From the individual point of view, 
the purpose of the financial investments 
(considering first of all securities) is to 
achieve profit, but from the aspect of the 
economy, the purpose is to permit greater 
mobilization of the free money either in 
national or world-wide. Namely, such 
instruments allow reallocation of the free 
money from the civil to real sector, 
sector which is a mover of the economy 
development.  Considering that Republic 
of Macedonia is faced the problem of 
insufficient capital, it appears as a 
necessity for greater actualization and 
implementation of such instruments of 
the capital market. From one side it 
requires to structure the capital market, 
to implement the required legal 
regulation for its right function, but from 
other side it also needs greater 
information of the physical and legal 
subjects about the performance for such 
type of investment.   
First of all, the entrance of the 
foreign capital in our economy has 
happened throughout the privatization 
process of the social and public 
enterprises (power supply, 
telecommunication, etc.) with buying 
greater or lower part of the capital of the 
existed enterprises. Unfortunately, in a 
very low part it’s happened as a result of 
form the new capacities so called 
greenfield investments for which the 
capital would be provided throughout 
issuing the certain type of security or 
share. From there also comes out the 
need to make greater efforts to attract the 
foreign portfolio investments, but in new 
capacities in the next period.  Also, 
considering the capital provided for the 
corporations throughout issuing and 
selling the securities in our country in 
accordance to former practice and 
development level of the Macedonian 
capital market it would be possible to 
notice one and only type of securities –
stocks. From here comes out the need for 
further development of capital market 
throughout the development and 
implementation of other financial 
instruments (corporative bonds, financial 
derivatives, etc.) that would be put in 
function of the corporations and social 
and economic community. AE  Economic Interferences 
 
Nr. 21● Februarie 2007  39
 
 
Endnotes 
 
(1)The Stock Exchange consists by 20 stock holders: 8 brokerage houses, 8 banks, 1 
insurance company and 3 private subjects. 
(2)Harry Markowitz has established (has defined) the model of deciding in portfolio 
context for the first time in the financial theory. Widely for the basic assumptions of this 
model see  Really K.F., Brown C.K.:"Investment analysis and portfolio management", 
seventh edition, Harcourt College Publisher, 2002, p. 211. 
(3)Brigham F.E. and others: "Financial management: Theory and practice", ninth 
edition, Harcourt College Pub., 1999, p.169. 
(5)The rate of return of the separated assets is calculated as total of possible expected 
rate of return for certain asset and possibility for their realization: 
∑
=
=
m
j
PjRj Ri E
1
) (  
-Rj- expected rate of return for j possible output; 
- Pj – possibility for j output. 
(6)The standard deviation and variance present as one measure of risk in accordance 
with that variance presents root of the standard deviation. 
(7)When its value is –1, in that case come in consideration the securities that are in 
total negative correlation that would be mean that their rates of return move in the contrary 
directions in the certain economic terms. From here, forming of a portfolio with such   
correlation coefficient would be mean to form riskless portfolio, or portfolio with standard 
deviation  σp=0.  But when it is +1 when exists total or perfect positive correlation, 
diversification of the portfolio would not be has any effect to the degree of the portfolio 
riskness, exactly the portfolio riksness will not be different from the riskness of the 
separated assets contended in it. 
 
References 
 
1. Boskovska D. Efficiency at financial investments, Economic development, Year 7, 
No.1-2-3, Institute of economics, Skopje, 2005 
2. Brigham F.E. and others. Financial management: Theory and practice, ninth 
edition, Harcourt College Pub., 1999 
3. Really.F., Brown C.K. Investment analysis and portfolio management, seventh 
edition,  Harcourt College Publisher, 2002 
4. William Sharpe. Risk, market sensitivity and diversification, Finance Analysts 
Journal, jan.-feb., 1995 
 
 
 

and others. Financial management: Theory and practice, ninth edition, Harcourt College Pub.,

Efficiency at financial investments, Economic development, Year 7, No.1-2-3, Institute of economics,

Investment analysis and portfolio management, seventh edition,

market sensitivity and diversification, Finance Analysts Journal, jan.-feb.,

FINANCIAL ASSETS AND THEIR EFFICACY

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