BBSE Research Projects (2014)

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Examining the potency of foreign currency as an asset class - evidence from Kenya
(Strathmore University, 2014) Mwaniki, Maryanne Wairimu
In this study I allocate currency assets namely, the US dollar, the Great Britain Pound, the Japanese Yen and the Tanzanian shilling to a portfolio using mean variance optimization. Similarly, I analyze currency as an asset class within the Kenyan context and given the various attributes pertaining to asset classes, the currency portfolio exhibited all the characteristics. The portfolio had positive returns thus giving investors an opportunity to make profits; the assets are strictly mutually exclusive since they can only be classified under currency assets, homogenous and liquid. The Tanzanian shilling met the criterion that assets should have low correlations relative to other asset classes. However, the pound, the dollar and the Yen exhibited quite high correlations to the equity class. Mean variance analysis has been used to create portfolios that minimize risk for a given level of return and the resulting currency portfolio performed better than the equity class given that it had higher returns and lower risk. The study lead to the conclusion that currency is an asset class and can be allocated to portfolios using mean variance optimization.