Abstract
In this paper, we use stock price data between the years 2007 and 2010 to investigate the allocation of assets on the GSE. The Classical Markowitz optimization method shows that, the most profitable portfolio is obtained by investing 90% of wealth in non-financial assets and 10% in financial assets. Risk aversive investor who goes for the minimum risk portfolio has to invest 80% in non-financial assets and 20% in financial assets. We also find that, if the investor decides to split his wealth among the financial and non-financial asset equally, his profit will not be as much as the minimum and the optimum risk portfolio. In effect, there is a reward for risk on the GSE but the Markowitz optimization strategy never exceeds the buy and hold strategy of the market index.
Highlights
Markowitz (1952) portfolio theory provides the basis for modern theory of portfolio choices
Based on the correlation between the assets and the benefit of diversification, we study the allocation of wealth among the financial and non-financial assets on the Ghana Stock Exchange (GSE)
We conclude that on the GSE, individual, a pension fund or a mutual fund has to allocate more than 80% of wealth to non-financial portfolios for reasonable returns in the period of the study
Summary
Markowitz (1952) portfolio theory provides the basis for modern theory of portfolio choices. The intuition behind his theory is maximizing the expected returns while minimizing the risk of a portfolio From his concepts, the utility of the investor is mainly a function of the first two moments (mean and variance) of returns. Detail of the mean-variance theory indicates that investors prefer portfolios of securities with high-expected returns in relation to risk. The application of the theory demands knowledge of the expected returns (mean) of all assets under consideration and their standard deviations (risk). With the information on mean, standard deviation and correlation, a set of efficient portfolios can be computed These portfolios maximize expected returns for various levels of risk.
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