Abstract: The purpose of this study therefore was to establish the effect of portfolio diversification on financial performance of NSE listed commercial banks in Kenya. The study was anchored in the modern portfolio theory, capital asset pricing model, arbitrage pricing theory and information asymmetry theory. The study used a descriptive research design and targets commercial banks listed at the Nairobi Securities Exchange. A census of all the 11 banks was conducted. The study used secondary data sourced from participating banks financial statements, NSE statements and CBK annual supervision reports. Descriptive methods such as frequency distribution, percentages mean, and standard deviation were used to analyze data. Regression analysis was employed to find out the relationship between variables. The Statistical Package for Statistical sciences (SPSS) version 23 was used to analyze data with the aid of a computer. Presentation of the findings will be done through tables and graphs. The study found that there was a strong positive correlation (r=0.872) between investment portfolios and financial performance of commercial banks. According to the findings, 76% of financial performance of commercial banks could be attributed to the investment portfolios. Analysis of variances showed that invest portfolios were significant (f (4,6) =4.760, p=0.045) signifying a significant relationship between investment portfolios and financial performance of commercial banks. Investment in government securities (p=0.018), investment in real estate (p=0.048) and investment in loans (p=0.039) were all significant at 95% confidence level. Beta values showed that investment in loans (β =1.085) was the most affecting followed by investment in real estate (β =0.867), investment in securities (β =0.712) and investment in stock (β =-0.169). The study concluded that portfolio diversification enhances bank performance. Investments in government securities, real estate and loans lead to increased bank performance. However investment in stocks negatively affects bank performance. The study recommended that banks should vigorously pursue portfolio diversification. The study recommended that banks should increase investments in government securities, real estate and loans. However, investments in stocks should be re-evaluated as they were found to negatively affect bank performance.
Keywords: Portfolio, Portfolio Diversification and Financial Performance.
Title: Effect of Portfolio Diversification on Financial Performance of Commercial Banks Listed At NSE, Kenya
Author: Juliet Kathoni Muthui, Dr. Matanda Wepukhulu
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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