Investment and portfolio optimization of the Ghanaian financial market

Abstract

In the single period Markowitz model, the investor maximizes the expected return of the portfolio and minimizes the risk, measured by the variance of the portfolio returns. Investor considering investments in sectors under GSE is faced with the problem of choosing from a large number of sectors and how to allocate his funds over this group of sectors due to the reforms that occur at the various sectors. As a result, the recent financial crises which has led to the extinction of many institutions such as GN Bank, UT Bank and more have made old literatures on portfolio optimization on the Ghana stock exchange vulnerable. This is because some equities that were considered in portfolio are no more in existence. This issue is addressed by creating a new portfolio optimization after this financial sector reforms. A historical secondary data of nineteen companies were obtained from Ghana Stock Exchange. Variance-Covariance, Correlation and Standard Market Model methods were employed to determine stock and portfolio performance in the Ghanaian financial market. Models were developed to maximize returns and minimize risk. 38.84 percent stock index were found aggressive and 26.32 percent stocks overperformed. For investor to take up investment decision TOTAL, AYRTN, UNIL and CLYD were efficient and the most efficient stock is UNIL. The study finally recommended that, prospective investors especially the risk averse to take up risky investments via diversification using the research outcome as working tool. Companies on the GSE are also expected to put in place measures that can help improve on performance with respect to dividend payment and returns that the companies pose. Portfolio managers should constantly restructure their portfolio due to reforms that occur at various sectors of the GSE