The effect of portfolio optimization on the returns of listed companies at the Nairobi securities exchange
Abstract
Portfolio optimization is the practice of determining the ‘best’ allocation of assets within
a portfolio in order to maximize returns at a given level of risk. The study aimed at
establishing the effect of portfolio optimization on returns of listed companies at the
Nairobi Securities Exchange. Markowitz’ mean-variance optimization model was used to
analyze the risk and returns of the portfolios. Secondary data of consistently trading
companies’ stocks at the NSE during the period July 2008 to June 2013 were used to
compute risk and returns thereafter construction of portfolios.Risk was based on beta of
the stocks. The risks and returns of the constructed portfolio was compared to the
benchmark portfolios, GMVP and naïve (1/N) portfolio, to check significance of the
differences between the returns and risk of portfoliosby conducting T-tests. The study
was descriptive in nature. Monthly stock prices risk and returns were computed. Single
Index model was used to select stocks to the optimal portfolio with 2 out of the 45 stocks
in the sample selected to the portfolio. The study found significant difference between
return, risk and risk adjusted returns of optimal portfolio and the GMVP and naïve (1/N)
portfolio thus portfolio optimization leads to better absolute and risk adjusted returns.
The results are consistent with research findings in the literature review. Investors are
recommended to optimize their portfolios to maximize the returns of their portfolio and
the regulatory authorities such as the Capital Markets Authority and Insurance
Regulatory Authority put in place policies that encourage portfolio optimization.
Citation
Master of Business AdministrationPublisher
University of Nairobi