Determining the Risk Minimizing Portfolio at the Nairobi Stock Exchange

Abstract

This study evaluates the risk reduction benefits of portfolio diversification at the Nairobi Stock Exchange. Risk is estimated using variance and standard deviation. The study uses the mean variance analysis model, and the period of study is 1996 to 2000. The analysis indicates that there is significant risk reduction at the Nairobi Stock Exchange as a portfolio grows in size. This continues until a portfolio size of about 13 securities is held, beyond this size the risk reduction becomes insignificant. At this optimal portfolio size the proportion of total risk eliminated is 34%. This shows that the current size of the NSE does not fully diversify specific risk. This is an indicator that deliberate efforts need to be made to widen the market in order to enhance further diversification. x