Influence of Portfolio Diversification Practices on the Financial Performance of Investment Firms Trading at the NSE

Norris Kibe Muhia (), Prof. Agnes Ogada () and Dr. Jane Muriithi ()

American Journal of Finance, 2025, vol. 11, issue 1, 24-35

Abstract: Purpose: Portfolio diversification plays a pivotal role in determining firms' financial performance. However, there is limited evidence of studies specifically focusing on how portfolio diversification influences the financial performance of investment firms in Kenya. This study, therefore, sought to provide a comprehensive analysis of the firm factors influencing the financial performance of investment firms trading at the NSE. Materials and Methods: Using a correlational research methodology and positivist philosophy, this study looked at how firm-specific characteristics affected the financial success of 63 investment businesses that were listed between 2014 and 2023 on the Nairobi Securities Exchange (NSE). Utilizing a census methodology, information was gathered from secondary sources such as NSE, CBK, and KNBS. With the use of diagnostic tests to guarantee data reliability, panel regression models examined the connections between risk management, corporate governance, portfolio diversification, and asset allocation. Utilizing statistical analytic methods such as SPSS, the results were presented, and the moderating influence of ownership structures was also assessed. Additionally, the data was presented using tables and figures. Findings: Descriptive analysis revealed significant variability in diversification strategies, with an average portfolio size of Kshs 211.06 billion and notable disparities in asset bases. Trend analysis from 2014 to 2023 showed fluctuations in portfolio sizes and turnover, with loan portfolios steadily growing to a peak of Kshs 177.45 billion in 2023. Regression results confirmed that portfolio diversification positively influenced financial performance, explaining 39.22% to 44.97% of variability. Implication to Theory, Practice and Policy: To enhance this aspect, firms should expand their portfolios to include a broader range of asset classes and geographic regions, thereby reducing risk and improving potential returns. Conducting thorough market research to identify diversification opportunities and utilizing sophisticated analytics will guide effective diversification strategies. Regular portfolio reviews and adjustments based on market conditions are essential for maintaining a well-diversified portfolio aligned with financial objectives.

Date: 2025
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