Portfolio Optimization for Stock Market in Ghana Using Value-at-Risk (VaR)

Eric Kwame Austro Gozah,Eric Neebo Wiah,Albert Buabeng,Paul Yaw Addai Yeboah

doi:10.11648/j.ajmcm.20200503.11

Eric Kwame Austro Gozah, Eric Neebo Wiah + Show 2 more

Open Access

https://doi.org/10.11648/j.ajmcm.20200503.11

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Abstract

The study was conducted to identify the performing stocks as well as examine the portfolio optimization with associated Value at Risk (VaR) for some selected stocks on the Ghana Stock Exchange (GSE). A historical data of 15 companies categorized into Financial Stock Index (FSI) and Composite Index (CI) from 2000 to 2017 were obtained from Bank of Ghana (BoG), Ghana Stock Exchange (GSE) and Gold Coast Security (GCS). From the study, ETI, HFC, SIC, TOTAL, FML, UNIL and GOIL stocks were identified to be over performing on the Ghana Stock Exchange. Also, CAL, EBG, ALW, AYRTN, GOIL were identified as aggressive stocks; GCB, SCB, TOTAL, GGBL as defensive stocks; and ETI, HFC, SIC, FML, PZC, UNIL as inversely moving towards the market return. The optimal portfolio asset allocation, for the minimum VaR portfolio showed a marginal diversification in other stocks in the cases of FSI, but greater portion was invested in HFC. However, in the case of CI displayed no indication of diversification in the portfolio as 67.30% of investors invested in AYRTN and only 32.70% in the remaining securities. The study then proceeded to find the optimal portfolio with risk-free asset for both indexes. It was recommended that further study should extend the approaches used by considering Conditional Value at Risk (CVaR) as the VaR measure does not give any information about potential losses in the worst cases.

Highlights

The borders of the financial markets expanded so that people in different parts of the world can invest in the markets of other countries
It is observed that the value for the Value at Risk (VaR) limit at 10% (VaRc = 0.1) is quite high because the optimal portfolio invests much in EBG (0.394), SIC (0.315) and GCB (0.245) and goes short in the other securities to generate the amount invested in the three assets mentioned
It is concluded that ETI, HFC, SIC for the Financial Stock Index (FSI), and TOTAL, FML, UNIL and GOIL for the Composite Index (CI) were identified as the over performing stocks on the Ghana Stock Exchange

Summary

Introduction

The borders of the financial markets expanded so that people in different parts of the world can invest in the markets of other countries. In this complex system, investors are concerned with the risk of their investments and it is their humble wish to construct portfolios that would take less risk and get more returns. This question is relevant because at the end of 2004, Ghana Stock Exchange (GSE) was adjudged the world’s best-performing market with a year return of 144 percent in US dollar terms, compared with 30 percent return by Morgan Stanley Capital International Global Index [10]. Despite its improvement in 20 years of operation, GSE still has relatively small number of companies listed on the stock exchange (compared to other Africa countries like Kenyan, Namibia, Egypt, South Africa etc) even though in terms of indicators, it is one of the fastest growing Africa stock markets [12]

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