Relationship between Investment Portfolio Choice and Profitability of Investment Companies Listed in the Nairobi Securities Exchange

Abstract

The portfolio choice problem and the optimum allocation of resources under multiple investment options is not a new topic in the economics literature. Investment is driven by three basic needs: income, capital preservation and capital appreciation. In most emerging markets financial liberalization has been accompanied by sharp fluctuations in key macro and micro prices together with increasing uncertainty. Investment is the sacrifice of current consumption for future consumption whose objective is to increase future wealth. The sacrifice of current consumption takes place at present with certainty and the investor expects desired level of wealth at the end of his investment horizon. This study sought to establish the relationship between investment portfolio choice and profitability of investment companies listed in the Nairobi Securities exchange. The research design employed in this study was descriptive research design inform of a survey. The population of interest in this study comprised of the four companies listed as Investment Companies at the Nairobi Securities Exchange (NSE, 2012). The study employed a stratified random sampling to select 49 senior and middle level managers who are in-charge of the different lines of investments engaged by their organization from each firm`s finance and investments division. The study had a sample of 49 respondents. Questionnaire was designed to establish the relationship between investment portfolio choice and profitability of investment companies listed in the Nairobi Securities Exchange. The researcher used structured questionnaires as the main data collection instrument. Pilot testing was conducted to establish the validity of the research instrument. The content analysis was used to analyze the respondents‟ views about the relationship between investment portfolio choice and profitability of investment companies listed in the Nairobi Securities Exchange. Tables and other graphical presentations as appropriate were used to present the data collected for ease of understanding and analysis. Data was presented using tables, and pie charts to make them reader friendly. The study found that investment is not just about picking stocks, but about choosing the right combination of stocks among which to distribute one's nest egg, investment managers strategy is to invest in various assets which can generate optimal returns while keeping risks at its minimal. The study also concludes that investment projects which tend to promise both high returns and a high risk are not attractive for most institutional investors.Institutional investors maintain a conservative investment style, trying to combine the highest return with the lowest risk level in the investment portfolio, there exist a relationship between the returns of a portfolio and the returns of a single asset, investor looks forward to getting good return for their investment as a compensation or reward for taking a risk in an investment. The study further concludes that revealed that risk assessment of the investment opportunities has an effects on performance, during investment emphasis should be put on the importance of interest rates in investment decisions, changes in interest rates should have an effect on the level of planned investment undertaken by private sector businesses in the economy and regarding liquidity the study concludes that investment institutions utilize their exposure and resources to develop detailed economic analysis and market area studies, liquidity preference affects the performance of investment companies, and finally that there is a great need for investors for real investment trusts because they considered offering more liquid investment vehicles that formed part of a well-diversified investment