Can Investors Apply Modern Portfolio Theory To Achieve Higher Returns. An Empirical Study Into The Relationship Between Portfolio Size And Portfolio Return (2016)
Diversification is a rational investment strategy for the risk averse individual in a homogeneous securities market. In the light of this, the present paper examines risk, return and the prospect of portfolio diversification in financial market over the period 1990-2006. Essentially, the purpose of this dissertation is to investigate whether investors can apply Modern Portfolio theory in order to achieve higher return.
The objective of this dissertation is to strengthen the existing empirical studies regarding the relationship between portfolio size and portfolio return, and between portfolio size and portfolio risk. The author found out that the marginal reduction in a portfolio’s risk is not proportionate with the portfolio size. Subsequently, we strengthened the existing studies and agreed that a majority of the risk is worn out when securities within a portfolio increase from 1 to 4.
In reference to the fact that correlation of returns across countries is much lower in comparison to domestic, we therefore considered undertaking international investment. Furthermore, we compared domestic diversification with international investment by making a comparison between the Return-risk ratio, Sharpe ratio and respective efficient frontiers. In consequence, we established that although international diversification outperforms domestic, we could however, increase our return if we mix our investments in both. By this, we mean to minimise the risk through managing an optimal risky portfolio with the guidance of MPT.
- 10,000 words – 42 pages in length
- Excellent use of literature
- Excellent analysis of subject area
- Well written throughout
- Ideal for finance and accounting students
1 – Introduction
The Aims and Objectives of the Study
Disposition of The Dissertation
2 – Frame of Reference
3 – Methodology
Effect of Diversification
Efficient Frontier Using Domestic Stock
Efficient Frontier Using International Stock
Comparison Between Domestic and International Diversification
Minimum Variance Portfolio
4 – Analysis of Results
5 – Conclusion