Portfolio Diversification Strategy on Large Cap Stocks in Tokyo Stock Exchange

Muhammad Jaffar Sadiq Abdullah, Norizarina Ishak

The aim of this paper is to examine the best portfolio diversification strategy in three subperiods which are during the global financial crisis (GFC), post-global financial crisis and during the non-crisis period. Two types of diversification strategies are used and compared which are Markowitz’s mean-variance approach and naïve diversification. From past studies, many pieces of evidence have shown that naïve diversification strategy sometimes performed better or not as compared to the mean-variance framework. Therefore, in this study, we incorporate ten securities from five different industries to minimize the risk portfolio. We found that during the non-crisis period, the portfolio is not well diversified. Then, we construct ten efficient portfolios from the mean-variance approach. We choose and com-pare the optimal portfolio selected based on the risk-averse preference with the naïve portfolio. Performance wise that optimal portfolio dominated the naïve strategy throughout the three subperiods tested. All the optimal portfolios selected are yielding more return com-pared to the equal weight portfolio.

Volume 11 | 12-Special Issue

Pages: 126-136