Non-Diversifiable Risk in Investment Portfolios --- an Aid to Investment Decision Making

Abstract

Modeling Non - Diversifiable risk in investment portfolios is undertaken in this paper together with redefinition of estimators of diversifiable risk and portfolio expected returns to reflect normal market conditions. GARCH (General Auto - Regressive Conditional Heteroskedasticity) models are then used to make forecasts of given time series, from which future predictions of Non - Diversifiable risk, Diversifiable risk and portfolio expected returns are made. The required investment decisions are then made. In making investment decisions several factors are considered. These include profits, dividend yield, price earning ratios, and expected future performance of financial institutions. This paper has considered expected future performance of financial institutions. In particular the paper derives a method of determining non - diversifiable risk in investment portfolios that enables investors and investment managers make viable investment decisions. This study is expected to improve the accuracy of predicting future expected performance of financial institutions. Investment analysts can now rely on the predictions to make good investment decisions.