Portfolio Risk and Return Through Inter-Sectoral Diversification

Abstract

Sectoral diversification is identified to be of a reduced risk, enjoying the sector-wise investment offers exposure to less risky investment than expected by an individual stock. This sectoral investment breeds growth among segments, diversify portfolio and manage risks that are involved in individual stock. Considering all the advantages of sectoral investment, this area in the field of research has received little attention. In this study we examined how investors would be able to reduce risks through suitable portfolio diversification and selection among the sectors. Using data from the Ghana Stock Exchange (GSE), investors have been provided with several opportunities that identify and evaluate the various sectors to invest into, in order to reduce portfolio risk. Five out of eight sectors have been used to build asset mix that minimizes risk, maximizes returns and provide optimal portfolios of which an investor can diversify. Using the Markowitz model, the study has developed portfolios that are on the global minimum variance, that is on the tangency and those that are on the efficient frontier. These techniques have provided an asset mix that maximizes overall investor returns, minimized overall investor risk and also constitutes an optimal portfolio. Investor therefore can choose asset mix of portfolio to invest based on their risk characteristics. The study recommends that the investors should analyse their risk and returns characteristics before they choose a portfolio that best suit them and invest so that they will not be at a loss.