Abstract
This study examined the diversification opportunities within sectors of Colombo Stock Exchange by measuring co-integration among sectors. Those sectors of CSE which are not integrated with others offer good diversification opportunities. Moreover, the study also applies Granger Causality Test to determine which sectors of CSE cause other sectors. This helps an investor informing a diversified portfolio. This study employed daily closing indices of all sectors listed in Colombo Stock Exchange during the period from 1-12-2003 to 31-8-2016. Multivariate Co-integration and Pairwise Co-integration Tests are applied to determine integration among sectors and Granger Causality to determine causal relation among these Sectors of CSE. Stationarity by unit root test revealed that the fourteen sectors are selected for running cointgeration at Level 1. Findings examined that no sector is integrated with other sectors. Thus, CSE provides excellent diversification opportunity to the investors. From an investor point of view, the findings of the study are helpful for a well-diversified portfolio by selecting stocks from those sectors which are not integrated with other sectors and minimize the unsystematic risk. This study significantly contribute the existing literature particularly those investors who want to diversify their portfolios domestically rather internationally.
Highlights
Modern Portfolio Theory Harry Markowitz’s (1952) is an important landmark in Finance that changed the dynamics of Portfolio Formation
This study examined the diversification opportunities within sectors of Colombo Stock Exchange by measuring co-integration among sectors
Empirical Results 4.1 Descriptive Statistics Table 1 presents the descriptive statistics of the returns of all listed and studied indexes in Colombo Stock Exchange
Summary
Modern Portfolio Theory Harry Markowitz’s (1952) is an important landmark in Finance that changed the dynamics of Portfolio Formation. He introduced the concept of correlation among securities and argued that while forming a Portfolio, those securities should be selected that are negatively correlated with each other. This helps in reducing the unsystematic risk of an investor. Following MPT, investors began to diversify their portfolios. They diversified their portfolios in the domestic context. The concept for formation of globally diversified portfolios began. Globalization, emergence of multinational companies and electronic trading of stocks increased cross border investments
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