Effect of Portfolio Diversification on Equity Returns of Individual Investors Listed at Nairobi Securities Exchange, Kenya

Abstract

The aim of this research project was to establish the effect of portfolio diversification on equity returns of individual investors listed at the Nairobi Securities Exchange, Kenya. This study used descriptive survey research design. The study was analysed using multiple linear regression. Pearson’s co-efficient of correlation was used to analyse the relationship between variables used in this study. Regression model was adopted to determine the effect of portfolio diversification on equity returns of individual investors. Normalized Portfolio Variance was used to measure portfolio diversification and four control variables were included, namely; gender, age, education and experience. The statistical significance of each independent variable was tested by performing a t-test at 5% level of significance. Significance of regression model was tested by performing an F-test at 5% significance level. The independent variables explanatory power was evaluated using the coefficient of determination, R2. The variables portfolio diversification, gender, age, education and experience were found to have a negative linear relationship with equity returns of individual investors. The result showed a negative effect between portfolio diversification and equity returns of individual investors. Result of t-test indicated that the effect was statistically significant. It was also found that gender, education and experience had a negative effect on equity returns of individual investors but not statistically significant. Age was found to have a positive effect on equity returns of individual investors but was not statistically significant. The adjusted 𝑅2 was found to be 0.084. This depicts that the independent variables used jointly explained just 8.4% of variation in the equity returns of individual investors. The study concluded that holding a diversified portfolio is inappropriate to individual investors since diversification had a negative effect on equity returns. It also concluded that gender, education and experience had a negative effect on equity returns of individual investors while age had a positive effect on the equity returns of individual investors. The study recommends that, individual investors should hold concentrated portfolio rather than diversified portfolio because diversification results to negative equity returns. The study proposes that financial managers in the stock brokerage firms should give guidance to their customers on how to select concentrated stocks that are highly performing rather than trading in many stocks that will end up giving them negative returns. The limitation that arised from this study is that it focused only on the individual investors and the findings cannot be used by other institutional investors on decision making. Further the study suggests that other researchers should consider portfolio diversification and equity returns of institutional investors listed at the NSE.