Improved investment performance using the portfolio diversification index (original) (raw)
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2008
Diversification is one of the three most prominent elements of portfolio management with risk and return being the other two. In addition, diversification is a core objective for combining assets and is a central tenet of portfolio construction. It is also widely known that diversification is concerned with the number of unrelated sources of return and in essence the aim of diversification is to eliminate unsystematic risk from an investment portfolio while systematic risk will remain as it can not be diversified away. This study focuses on the concept of diversification in an investment portfolio setting, while specifically investigating a relatively "new" diversification measure, the Portfolio Diversification Index (PDI).
2019
The concept of portfolio diversification has taken a global centre stage in the process of determining financial performance of investment companies and continues to be an increasingly important aspect of investment decisions in the world of today. The general objective of the study was to determine the effects of portfolio diversification on the financial performance of investment companies listed at the Nairobi Securities Exchange. The study was guided by the following objectives; to determine the effects of bonds investment on the financial performance of investment companies listed at the Nairobi Securities Exchange; to determine the effects of real estate investment on the financial performance of investment companies listed at the Nairobi Securities Exchange and to analyse the effects of equity securities investment on the financial performance of investment companies listed at the Nairobi Securities Exchange. This study adopted descriptive research design and the use of secondary data. The secondary data was sourced from the five investment companies listed on the NSE published annual financial statements. The study was from 2010 to 2017. Descriptive statistics were used to analyse the various ratios of financial performance over the period 2010 to 2017 and data presented in the form of graphs. Inferential statistics were used to vii DEDICATION This project is dedicated to my father Maricus Obiero, Mother Pamela Obiero and siblings Brian, Cynthia and Elsie for their tireless, unending support and encouragement throughout my education journey. viii TABLE OF CONTENTS STUDENT DECLARATION .
Strategic Management Journal, 2003
Measures developed for the analysis of corporate diversification have become fundamental to a broad range of strategy research. This paper examines the content validity of the two most widely used continuous measures of related diversification -the related component of the entropy index and the concentric index -and raises fundamental questions about their validity as indicators of portfolio relatedness. These questions are not driven by the use of SIC data for estimation of the indexes; they involve validity problems intrinsic to the construction of the measures. The related component of entropy and the concentric index are sensitive to features of corporate portfolio composition that may not be directly linked to portfolio relatedness. These sensitivities can create important ambiguities in strategy research.
A framework for evaluating the benchmark risk of South African equity portfolios /
Investment Analysts Journal, 2008
The aim of this study is to identify and quantify those primary aspects of risk which impact on the construction of benchmark ind ices as well as active portfolios in the South African market. The appropriateness of tile application of the new FTSE classification structure with regard to the particular structure of the local exchange on 30 June 2002 has been placed in question. An initial cluster analysis of the index returns underlying the new classification demonstrated that there were significant behavioural anomalies amongst the new index structure with many Financial-Industrial indices now grouped closely with Resources stocks. A principal factors analysis of the market sectors indicated that the strong Financial-Industrials and Resources dichotomy was present within the market but also demonstrated that a number of Financial-Industrial indices, most notably Basic Industries and Cyclical Consumer Goods, demonstrated either loadings on both factors or loaded solely on the Resources factor rather than their own Financial-Industrials factor. An investigation on a share level found that in most cases one or two large cap shares were responsible for the behaviour of their sectors as a whole and that each of the shares in question was either dual-listed or had significant exposure to foreign markets.
Issues and Trends of Portfolio Diversification
International Journal of Academic Research in Business and Social Sciences, 2019
The concept of diversification has been a great importance in risk management and investment decision making in the capital market. The purpose of this paper is to examine the issues and trends of diversification of risk on capital market. In addition, the paper highlight some of the latest trends and developments in the area namely multi-asset class investment and comovement of risk and return. Moreover, in light of the basis of modern capital market theory developed by Harry Markowitz, the paper review some of the approaches developed to address the challenges encountered when using diversification strategy in practice, including the portfolio choice problem, alternative assets class and time-varying volatility assessment.
Diversification of equity investment portfolios. Application to the IBEX 35
Finance, Markets and Valuation, 2021
At present, there is no unanimity on the effects that stock diversification can have on the total risk of an investment portfolio. In this context, this paper studies some issues related to the evolution of risk in an investment portfolio made up of IBEX 35 stocks. In addition, it is tested whether conclusions drawn for other time periods and in other markets are applicable to the Spanish stock market. The methodology used consists of calculating how the two components that make up the total risk of a portfolio (systematic risk and unsystematic risk) behave as portfolios of increasing size are diversified. The study shows how an increase in the number of securities in the investment portfolio decreases the percentage corresponding to the unsystematic risk component and increases the systematic risk component. Furthermore, it also shows that the benefits of diversification become increasingly marginal as portfolio size increases. Additionally, it is shown that an increase in the numb...
Relationship between portfolio diversification and value at risk: Empirical evidence
Emerging Markets Review, 2011
This research explores the risk associated with the stocks prices in the seventeen selected companies that are listed in Indian BSE (100) National as well as portfolios of investment that are constructed from these seventeen companies employed. Additionally, for considering the possibility of international diversification, construction of portfolios of investment form stock price indexes in various emerging markets and developed countries of the world is considered. Correlations for domestically as well as internationally diversified portfolios are computed to unveil the relationship between stock prices of various firms as well as domestic and internationally diversified portfolios of investments. Further, to understand the effect of diversification on the risk associated with each of the portfolios of investments employed, value at risk analysis (VaR) is undertaken for studying the benefits associated with domestic as well as international diversification (if any). The study results show that domestic diversification lowers the expected losses associated with each of the domestic portfolios of investment employed where the international diversification substantially mitigates the portfolio risks. Results from VaR analysis reveal that diversification lowers the portfolio risks and additional reduction in portfolio risks is realized by international diversification.
The Impact of Portfolio Diversification on Risk Management Practices
Commercial banks that manage a substantial share of the financial industry's total assets depend mostly on credit. Banks may increase their revenues via this function, one of the main tasks of commercial banks. It should be recalled that banks will differ in various ways in terms of their aims, services, and strategies. In reality, in their day-today operations, banks confront several risks. Bank Performance is highly affected by "Credit Risk" since it is the possibility that the total value of assets may change in value because the counterparty has failed to meet its commitments under the contracted liability. A bank's primary purpose is to accept deposits and provide credit facilities which thus become necessarily subject to credit risk. So, Credit risks constitute the most significant risk that banks are subjected to, and their success depends to a degree greater than other risks from accurate measurement and successful risk management. The study carried out a quantitative technique during the survey distribution to a certain number of participants, and the findings were seen concerning the regression. Pearson Correlations analyzes, and the findings indicated that market risk, liquidity risk, loan risk and solvency risks are directly linked. However,
Does Portfolio Diversification Affect Performance of Balanced Mutual Funds in Kenya
Literature provides conflicting results on the effect of diversification on performance of mutual funds with some studies showing a positive relationship (Markowitz, 1952; Muriithi, 2005; Kagunga, 2010), others negative (Chang & Elyasiani, 2008; Fiegenbaum & Thomas, 1998) and still others showing that there is no relationship between the two variables (Loeb, 1950). It is with this background that this study sought to establish the effect of diversification on performance of mutual funds in Kenya. The study took a descriptive research design approach on weekly performance of a sample of 7 balanced mutual funds for the year 2013.The study used secondary data sources available at the Capital Market Authority offices and from each mutual funds. The portfolio return was determined by computing the changes in prices of the balanced fund as traded at the Nairobi Securities Exchange (NSE) while diversification was determined from the level of Unsystematic Risk in the Performance. The study used the Ordinary Least Squares (OLS) multiple linear regression equation. Control variables of the size and age of the fund were introduced in the regression model. The results indicated the existence of a positive relationship between the Unsystematic Risk and Performance of balanced mutual funds with a beta coefficient of 0.069 (t=4.971, p < 0.5. This implies that the lower the diversification the higher the performance of mutual funds.