Comparison of 2 Portfolios: Undiversified and Diversified Among Industries of Kazakhstan.

Topics: Modern portfolio theory, Capital asset pricing model, Investment Pages: 11 (3195 words) Published: February 20, 2012
I. Introduction.
a. Objective(s). It is out of doubt that no matter how diversified the portfolio is, systematic risk can never be eliminated. The risk associated with individual stocks can be reduced, but general market risks affect almost every stock. So it is important to diversify between different asset classes and industries as well. The key is to find a medium between risk and return. The objective of this paper is to discuss importance of diversification of investment portfolio within industries and project the theory on the example of two portfolios. The first portfolio tends to be undiversified and consists of shares of companies from banking sector. The undiversified portfolio is as follows: Portfolio 1 (Undiversified):

1) Kazkommertzbank JSC shares
2) Halyk Bank JSC shares
3) BankCenterCredit JSC shares
The investments in the second portfolio are allocated among oil and gas, banking and telecommunications industries. Thus, it consists of following: Portfolio 2 (Diversified within industries):

1)”Kazakhtelecom” JSC shares
2) “Exploration and Production Kazmunaygaz” JSC shares 3) Halyk Bank JSC shares
b. Methodology. We will use quantitative research in our paper. The last 2-year information, on the years of 2009 and 2010, from January till December, in total 24 months stocks’ prices will be used as basic data in our research paper. The historical data of the companies was retrieved from Kazakhstan Stock Exchange. The companies that will be used in analysis come from 3 industries of Kazakhstan - banking, telecommunication and oil and gas. The authors of the paper decided to chose those mentioned industry, to test the diversification, due to the fact that those industries are well developed relative to other industries. And stocks of the aimed companies are frequently traded at KASE, so we were able to retrieve monthly stock prices data of above-said companies. We are going to use an expected return and standard deviation analysis of the portfolio and apply Markowitz theory. Two portfolios are to be compared in terms of their performance using Teynor’s and Sharpe’s Ratio. As the methodology and guideline for this paper, authors tried to apply the essential theory and topics from financial courses syllabus instructed by professors from Bang College of Business for Masters students. However, electronic articles and other relevant research papers (see bibliography) were used as well. c. Scope. There are included 5 companies and 1 asset class in this paper. The research will be done based on monthly prices of those 5 companies during 2 years (2009 and 2010, from January till December). d. Limitation. The data that we are supposing to use are not open, and it’s frequently confidential; hence we have some difficulties such as: restricted access to KASE, limited data, and lack of information about Kazakhstani companies which stocks are traded on national stock exchange. e. Significance of the issue. Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. Diversification of portfolio aims to maximize return and minimize risk as much as it possible by investing in different asset classes and different industries. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Within the context of our paper, and for the simplicity, we do not consider the outcomes of return and risk measurements when one is investing in different asset classes. We examine the portfolio which consists of stocks’ of companies representing different industries such as banking, mining and telecommunications. The authors of the paper think that there will be no diversification effect, as financial market is Kazakhstan is underdeveloped. We...
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