Does Portfolio’s Beta in Financial Market Affected by Diversification? Evidence from Amman Stock Exchange

Ali Matar

doi:10.5539/ijbm.v11n11p101

Abstract

This study’s goal is to examine the effect of diversification on the portfolio’s beta for stocks of companies listed on the Amman Stock exchange (ASE) return over the 2005-2014 period. Moreover, it will show if the investors can reduce beta in their portfolios by diversification. Monthly data, Capital Assets Pricing Model (CAPM) and portfolio selection model were applied to measure the risk and required rate of return and compare it with the realized rate of return. The results suggest evidence that diversification can only affect unsystematic risk leaving systematic risk unaffected. The regression analysis indicates the existence of a significant relationship between the individual stock β and the portfolio β. The results didn’t approve any relationship between the portfolio size and portfolio β, and the portfolio β is affected only by the individual stock β value.

Highlights

Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how risky asset should be priced. Markowitz (1952) showed that the variance of the return on a portfolio of financial securities depends on the riskiness of the individual securities in the portfolio, and on the relationship among these securities, i.e., on the covariance’s between the respective securities in the portfolio
This study focuses on the Markowitz model (1952) and the Capital Asset Pricing Model (CAPM) as derived by Sharpe (1964) and Lintner (1965), which is widely used in finance to determine the appropriate required rate of return of an asset or portfolio
This study attempts to examine the effect of diversification on the portfolio ß by applying the CAPM to measure the required rate of return for stocks of companies listed on the Amman Stock exchange (ASE), to compare it with the realized rate of return

Summary

Introduction

Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how risky asset should be priced. Markowitz (1952) showed that the variance of the return on a portfolio of financial securities depends on the riskiness of the individual securities in the portfolio, and on the relationship among these securities, i.e., on the covariance’s between the respective securities in the portfolio. Markowitz (1952) showed that the variance of the return on a portfolio of financial securities depends on the riskiness of the individual securities in the portfolio, and on the relationship among these securities, i.e., on the covariance’s between the respective securities in the portfolio. This study attempts to examine the effect of diversification on the portfolio ß by applying the CAPM to measure the required rate of return for stocks of companies listed on the Amman Stock exchange (ASE), to compare it with the realized rate of return. It will show if the investors can reduce β in their portfolios by diversification

Objectives

Methods

Results

Conclusion