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Portfolio Diversification Strategy in the Malaysian Stock Market

Author

Listed:
  • Raymond Leh Bin Ling

    (Faculty of Accountancy and Management, University Tunku Abdul Rahman 43000 Cheras Kajang, Selangor, Malaysia)

  • Jeng Yuan Chia

    (Faculty of Accountancy and Management, University Tunku Abdul Rahman, 43000 Cheras Kajang, Selangor, Malaysia)

Abstract

Two opposed, widely known portfolio strategies – active and passive portfolio investment strategy – claim their superiority in competing for the excellence of risk adjusted portfolio performance. This study investigates the portfolio strategy that would sustain the risk adjusted performance from investing in the Malaysian stock market. The performance measures from the Sharpe, Treynor and Jensen Index are used to analyse and rank the portfolio performance. The GARCH model is adopted to analyse the Malaysian stock market volatility over the 16-year period (1998-2013) and the crisis years (1998 and 2008). The different diversification levels are compared relatively from the correlations and co-integration based portfolios. The overall outcomes show that the active portfolio strategy outperforms the passive portfolio strategy. The co-integration based portfolio outperforms the correlation based portfolio over the long run. As opposed to developed markets, the analysis of the results prove that adding more stocks to portfolios will not result in significant diversification benefits.

Suggested Citation

  • Raymond Leh Bin Ling & Jeng Yuan Chia, 2016. "Portfolio Diversification Strategy in the Malaysian Stock Market," Capital Markets Review, Malaysian Finance Association, vol. 24(1), pages 38-67.
    • Handle: RePEc:mfa:journl:v:24:y:2016:i:1:p:38-67
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    More about this item

    Keywords

    Active and passive strategy; correlation; co-integration; GARCH.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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