Risk and Concentration of Portfolios on the Zimbabwe Stock Exchange after Currency Reform

Aims: The objectives of this study are to assess the level and impact of concentration of portfolios on the ZSE and to determine the number of stocks to be held in a concentrated portfolio to achieve effective risk reduction.

Study Design: Portfolio Model.

Place and Duration of Study: Zimbabwe, Department of Insurance and Actuarial Science and Department of Finance, between February 2013 and March 2013.

Methodology: We analysed the level of concentration of portfolios held on the Zimbabwe Stock Exchange (ZSE). The market capitalization weights and the daily closing prices of 62 stocks in the industrial index for the four-year period form 19 February 2009 to 31 December 2012.

Results: The Herfindahl-Hirschman Index and the Roll measure of concentration were employed to analyse the level of concentration of portfolios mimicking the industrial index and it was observed that portfolios held on the ZSE are highly un concentrated with an approximate measure of 14% under the HHI measure as at 31 December 2012. The daily returns over the period were calculated and used to estimate the risk of the portfolio. The findings indicates that stocks in the industrial index of the ZSE have relatively low correlation due to the small difference in risk between equally weighted portfolios with no correlation and equally weighted portfolios with historical correlation.

Conclusion: The empirical evidence highlights that an optimal portfolio size averaging 20 to 25 stocks of the Industrial Index stocks will have to be included in order to achieve effective risk reduction.