Portfolio Optimization and Its Effect on Performance of Commercial Banks in Kenya

A Research Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Master in Business Administration (MBA)The purpose of this study was to examine portfolio optimization and its effect on performance of commercial banks in Kenya. The study sought to answer the following research questions: What is the influence of asset allocation on the performance of commercial banks in Kenya? What is the influence of diversification on the performance of commercial banks in Kenya? What is the influence of risk management on the performance of commercial banks in Kenya? The target population consisted of Asset and liability committee (ALCO) members; portfolio managers, credit committee members, risk management, finance and treasury teams within commercial banks in Kenya. Stratified, simple random and purposive sampling techniques were used to select the study participants. Questionnaires and interview guides were used to collect data. The sample size was 139 for the questionnaires and 5 for interviews. The data presented were analyzed using descriptive statistical analysis and inferential analysis. The finding of this study is of benefit to commercial bank managers when making investment decisions for their firms. The decisions made on portfolio optimization impacts on the performance of commercial banks in Kenya. The findings revealed that there was a significant positive relationship between asset allocation and performance in commercial banks in Kenya. An increase in asset allocation result to a rise in performance in commercial banks in Kenya. The study established that asset allocation had the greatest influence performance in commercial banks in Kenya. A unit increase in asset allocation index led to a significant increase in commercial banks’ performance. The results indicated that there was a significant positive relationship between portfolio risk management and performance in commercial banks in Kenya. An increase in portfolio risk management led to an increase in performance in commercial banks in Kenya. Portfolio risk management had the second greatest influence on performance in commercial banks in Kenya. The findings showed that there was a significant positive relationship between portfolio diversification and performance in commercial banks in Kenya. An increase in portfolio diversification leads to an increase in performance in commercial banks in Kenya. Portfolio diversification had the least influence on performance in commercial banks in Kenya. Based on the findings the study concluded that asset allocation, portfolio risk management and portfolio diversification have significant influence on performance of commercial banks in Kenya. The study recommends that commercial banks in Kenya should intensify their asset allocation strategies with the aim of enhancing performance. This is because asset allocation has the greatest influence on performance in relation to the other portfolio optimization strategies adopted by commercial banks in Kenya. Commercial banks should pursue investment options with moderate level of risk and the potential for occasional short-term losses. They should also pursue investment with higher returns over time that has occasional, large downturn in the value of their variable investment