Optimizing Portfolio Performance on the Lusaka Stock Exchange: An Emperical Analysis using Markowitzs Modern Portfolio Theory

Abstract

This research aimed at establishing how the Modern Portfolio Theory of Markowitz could be applied and the effects on the portfolio optimisation of the Lusaka Stock Exchange (LuSE). More specifically, the objectives were to explore the characteristics of the original data on the relationship between risk and return on assets, to correctly allocate them optimal weights of assets, and finally, to compare the risk adjusted return of such MPT optimized portfolios with some portfolios that were not optimized in any way. A nonexperimental quantitative correlational research design was adopted. A total of 21 respondents out of the 22 listed companies of the LuSE were interviewed using a structured questionnaire on investors practice and perception. Lack of statistical significance notwithstanding, the study evidenced moderate positive relationship between historical returns in LuSE and voltality analysis among investors. The frequency of its use depended positively on familiarity with MPT and any application of it brought better portfolio results. As evident as it is MPT also optimized portfolios had higher risk return characteristics then non optimized portfolios even where relative extensive use was not made of sophisticated measures such as the Sharpe ratio. The former checks the soundness of the theoretical framework of the MPT and reassures the applicability of the MPT to portfolio selection. However, the essentially low levels of investor education as well as the weak base performance indicators approving the use of indicators can be considered as a drawback. These include risk adjusted metrics of more sophistication, enhancing usability of analytical instruments used in the portfolio, enhancing the knowledge of the investor, and exercising regular rebalancing in the portfolio.