The Performance of sector concentrated versus diversified equity portfolios in Kenya

Abstract

The purpose of this study is to compare the performance of sector concentrated equity portfolios versus diversified equity portfolios in Kenya. Sector concentrated equity portfolios are created when all funds available are invested in a particular segment of the economy to maximize returns. On the hand, diversified portfolios are created when funds available are invested in different sectors of the economy to minimize risks. The data used to construct the portfolios in this study is from 66 NSE listed firms classified into 8 sectors. NSE 20 Share Index is used as the benchmark index while the 91-Day Treasury bill is adopted as the risk free rate. The study period is from 2002 to 2016. Sharpe’s Single Index Model is used to construct diversified equity portfolios while CAPM and matrix algebra are used to construct sector concentrated equity portfolios. Sharpe ratio is used as performance measure to determine which portfolio is better performing. In this study, the higher the Sharpe ratio the better the portfolio performance. The study concludes that diversified equity portfolios perform better than sector concentrated equity portfolios over time. The study further concludes that the out performance is time varying.