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The Effect of Portfolio Diversification for the Bursa Malaysia

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  • Nadia Nadira Mohd Norsiman
  • Noor Azuddin Yakob
  • Carl B. McGowan, Jr

Abstract

This paper examines the effect of portfolio diversification for stocks listed on the Malaysian stock exchange. We determine the extent to which the unsystematic risk component can be reduced through diversification posited by Modern Portfolio Theory. Prices of randomly selected stocks were obtained from Yahoo! Finance for the five year period starting from January 2010 to March 2014. In order to analyze the robustness of the empirical results, three sets of portfolios were tested in this study and each set contained 55 stocks. The total sample of 165 stocks was chosen from different sectors that are listed under Bursa Malaysia. In addition, the three samples were tested for two type of differencing intervals, daily and weekly, to obtain more robust results. The empirical findings of the study show that increasing the number of stocks in the sample portfolio leads to decreasing standard deviation (unsystematic risk) the investment portfolio for Malaysia Stock Market stocks until each portfolio is well-diversified. The uniqueness in this study is that the empirical results show that, the level of data frequency significantly influences changes in stock portfolio size required to obtain optimal portfolio diversification. Using the daily differencing interval, 45 stocks are need to eliminate unsystematic risk and using the weekly differencing interval, only 35 stocks are required to obtain a well-diversified portfolio. Â

Suggested Citation

  • Nadia Nadira Mohd Norsiman & Noor Azuddin Yakob & Carl B. McGowan, Jr, 2019. "The Effect of Portfolio Diversification for the Bursa Malaysia," Accounting and Finance Research, Sciedu Press, vol. 8(4), pages 1-76, November.
    • Handle: RePEc:jfr:afr111:v:8:y:2019:i:4:p:76
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    References listed on IDEAS

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    1. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2011. "The effects of loan portfolio concentration on Brazilian banks' return and risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3065-3076, November.
    2. Rezayat, Fahimeh & Yavas, Burhan F., 2006. "International portfolio diversification: A study of linkages among the U.S., European and Japanese equity markets," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 440-458, October.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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