Portfolio Diversification Strategy in the Malaysian Stock Market

Raymond Leh Bin Ling () and Jeng Yuan Chia
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Raymond Leh Bin Ling: Faculty of Accountancy and Management, University Tunku Abdul Rahman 43000 Cheras Kajang, Selangor, Malaysia
Jeng Yuan Chia: Faculty of Accountancy and Management, University Tunku Abdul Rahman, 43000 Cheras Kajang, Selangor, Malaysia

Capital Markets Review, 2016, vol. 24, issue 1, 38-67

Abstract: Two opposed, widely known portfolio strategies – active and passive portfolio investment strategy – claim their superiority in competing for the excellence of risk adjusted portfolio performance. This study investigates the portfolio strategy that would sustain the risk adjusted performance from investing in the Malaysian stock market. The performance measures from the Sharpe, Treynor and Jensen Index are used to analyse and rank the portfolio performance. The GARCH model is adopted to analyse the Malaysian stock market volatility over the 16-year period (1998-2013) and the crisis years (1998 and 2008). The different diversification levels are compared relatively from the correlations and co-integration based portfolios. The overall outcomes show that the active portfolio strategy outperforms the passive portfolio strategy. The co-integration based portfolio outperforms the correlation based portfolio over the long run. As opposed to developed markets, the analysis of the results prove that adding more stocks to portfolios will not result in significant diversification benefits.

Keywords: Active and passive strategy; correlation; co-integration; GARCH. (search for similar items in EconPapers)
JEL-codes: G10 G11 G17 G32 (search for similar items in EconPapers)
Date: 2016
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