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The Effect of Portfolio Size on the Financial Performance of Portfolios of Investment Firms in Kenya

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The Effect of Portfolio Size on the Financial Performance of Portfolios of Investment Firms in Kenya THE EFFECT OF PORTFOLIO SIZE ON THE FINANCIAL PERFORMANCE OF PORTFOLIOS OF INVESTMENT FIRMS IN KENYA PRESENTED BY MBOGO PETER KIMANI: D61/61748/2010 A Research Project Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration (MBA), School of Business, University of Nairobi. AUGUST 2012 DECLARATION This research project is my original work and has not been submitted for the award of a degree in any other university. Signed: …………..……………………………….. Date: ………………………… Mbogo Peter Kimani Reg. No.: D61 /61748/2010 This research project has been submitted for examination with my approval as university supervisor. Signed: …………………………………………… Date: ………………………… Dr. Josiah Aduda Lecturer, Department of Finance and Accounting ii DEDICATION I dedicate this work to my wife and my children for their support during its preparation. Your patience and encouragement as I stayed away for long, either in class throughout the weekends, or in the field was really touching. iii ACKNOWLEDGEMENT A major research project like this is never the work of anyone alone. The contributions of many different people, in their different ways, have made this possible. First, I would like to thank God for the wisdom and perseverance that HE has bestowed upon me during this research project, and indeed, throughout my life. Second, I offer my sincerest gratitude to my supervisors; Dr. Josiah Aduda and Mr. Mirie Mwangi who have supported me throughout this research project with their patience and knowledge whilst allowing me the room to work in my own way. I appreciate the odd hours we spent discussing the reports. I wish to thank the respondents who participated in this study. I thank my parents for supporting me throughout all my studies from nursery school to university level. I can’t express my gratitude in words for my family. You have been a source of strength. iv ABSTRACT The purpose of this study was to determine the effect of portfolio size on the financial performance of portfolios of investment firms in Kenya. The research question therefore was; what is the effect of portfolio size on the financial performance of portfolios of investment firms in Kenya. The research design was descriptive survey study in nature since it focused on all investment firms in Kenya. The population of the study was all the investment firms in Kenya. This implied that the total population of this study is 90 firms as given by the Kenya Association of Investment Groups (KAIG). For representativeness purposes, the current study took a sample size of 50% of the population. This was 45 firms. This sample size was justified since this study could not anticipate how good the response rate would be. The 45 firms must have been in existence for 5 years. The study used secondary data from the financial statements of the investments firms. The selected period was 5 years. The researcher used frequencies, averages and percentages in this study. The researcher used Statistical Package for Social Sciences (SPSS) to generate the descriptive statistics and also to generate inferential results. Regression analysis was used to demonstrate the relationship between the portfolio size and the performance of investment firms The finding reveal that investments firms in Kenya had put the biggest allocation of funds in stocks, followed by real estate portfolio and the least holding was in bond and money market funds. The findings also reveal that that the stocks portfolio generated the highest returns followed by bond and money market returns while real estate portfolio generated the least returns. The first objective of the study was to establish the optimal portfolio size for investment firms in Kenya. The findings in this study indicated that an optimal portfolio should hold between 16 and 20 stocks. The second objective of the study was to determine the effect of portfolio risk on the financial performance of the investment firms. Results indicate that there is a positive relationship between portfolio risk and return. v TABLE OF CONTENTS DECLARATION ............................................................................................................................ ii DEDICATION ............................................................................................................................... iii ACKNOWLEDGEMENT ............................................................................................................. iv ABSTRACT .................................................................................................................................... v TABLE OF CONTENTS ............................................................................................................... vi LIST OF TABLES ......................................................................................................................... ix LIST OF FIGURES ........................................................................................................................ x LIST OF ACRONYMS ................................................................................................................. xi CHAPTER ONE ............................................................................................................................. 1 INTRODUCTION .......................................................................................................................... 1 1.1 Background of the Study ....................................................................................................... 1 1.1.1 The Concept of Portfolio Size................................................................................................ 1 1.1.2 Financial Performance ........................................................................................................... 2 1.1.3 Relationship between Portfolio Size and Performance .......................................................... 3 1.1.4 The Context of Investment Firms in Kenya ........................................................................... 4 1.2 Statement of the Problem ....................................................................................................... 5 1.3 Research Objectives ............................................................................................................... 6 1.4 Value of the Study ................................................................................................................. 7 CHAPTER TWO ............................................................................................................................ 8 LITERATURE REVIEW ............................................................................................................... 8 2.0 Introduction ............................................................................................................................ 8 2.1 Theoretical Review ................................................................................................................ 8 2.1.1 Markowitz Portfolio Theory .................................................................................................. 8 2.1.2 The Capital Asset Pricing Model ........................................................................................... 9 vi 2.1.3 Tobin Theory of Investment ................................................................................................ 10 2.2 Empirical Studies ................................................................................................................. 10 CHAPTER THREE ...................................................................................................................... 18 RESEARCH METHODOLOGY.................................................................................................. 18 3.1 Introduction .......................................................................................................................... 18 3.2 Research Design................................................................................................................... 18 3.3 Population ............................................................................................................................ 18 3.4 Sample.................................................................................................................................. 18 3.5 Data Collection Procedure ................................................................................................... 19 3.6 Data Analysis ....................................................................................................................... 19 CHAPTER FOUR ......................................................................................................................... 22 DATA ANALYSIS ....................................................................................................................... 22 4.0 Introduction .......................................................................................................................... 22 4.1 Descriptive Results .............................................................................................................. 22 4.1.1 Measures of Central Tendency ............................................................................................ 22 4.1.2 Annual Trends for Returns................................................................................................... 25 4.2 Model Results .....................................................................................................................
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