Analysis of the Effects of Diversification for Dar Es Salaam Stock Exchange Optimal Portfolio
Applied and Computational Mathematics
Volume 3, Issue 5, October 2014, Pages: 205-216
Received: Aug. 19, 2014; Accepted: Aug. 30, 2014; Published: Sep. 20, 2014
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Authors
Phares Kaboneka, Department of Applied Mathematics and Computational Science and Engineering, Nelson Mandela African Institution of Science and Technology, Arusha, Tanzania
Wilson Mahera Charles, Department of Applied Mathematics and Computational Science and Engineering, Nelson Mandela African Institution of Science and Technology, Arusha, Tanzania; Department of mathematics, University of Dar Es Salaam (UDSM), Dar Es Salaam, Tanzania
Silas Mirau, Department of Applied Mathematics and Computational Science and Engineering, Nelson Mandela African Institution of Science and Technology, Arusha, Tanzania
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Abstract
Dar es Salaam stock exchange (DSE) market is among the stock markets dealing with financial securities transactions and it operates under the brokerage system. Different individuals have little knowledge on how these stock markets operate and many of them fear to invest in stock business because they don’t have the base line of their decision especially on the risk bearings. This paper is based solely on DSE stocks data for the period of past nine years and it tries to give out the nature of return of the stocks, the effects on restrictions at the DSE stock environment to the stock returns and also it explores the effect of diversification on return and on risk (standard deviation). The study uses the classical Markowitz Modern Portfolio Theory (MPT) model in its analysis with little modification so as to meet with the DSE environment. Data from DSE was analysed by using the excel solver and its macros like the solver add – in. After the analysis it is observed that restrictions have an effect on the stock risk and return, where it reduce risk and increases return because the unconstrained frontier is greater than the constrained frontier. Moreover it is found that for the diversification to have a significant effect the stocks have to be nearly or perfectly negatively correlated.
Keywords
Stocks, Diversification, DSE, Frontier, Covariance Matrix, Expected Return, Portfolio
To cite this article
Phares Kaboneka, Wilson Mahera Charles, Silas Mirau, Analysis of the Effects of Diversification for Dar Es Salaam Stock Exchange Optimal Portfolio, Applied and Computational Mathematics. Vol. 3, No. 5, 2014, pp. 205-216. doi: 10.11648/j.acm.20140305.13
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