Effect of Portfolio Diversification on Commercial Banks Financial Performance in Kenya

Abstract

The study examined the effect of portfolio diversification on Commercial Banks financial performance. Mixed method of research design was used and data was collected using questionnaires and interview schedules. Target population was 43 licensed Commercial Banks in Kenya from which one hundred and thirty three (133) managers were randomly selected to form sample size. Validity of the research instruments was ensured through content, face and construct validity testing. Data was analyzed using descriptive statistics and inferential statistics which included correlation analysis and bivariate regression analysis. The study established a positive statistically significant relationship between portfolio diversification and financial performance. The portfolio diversification explained 68% of the changes in the financial performance of commercial banks in Kenya and that most banks diversify their investments which has enabled them to increase profits and performance in the past years.The study recommended that financial institutions should invest in a combination of assets which are negatively correlated because this maximizes revenue (returns) and minimizes losses (risks). Further study should be undertaken to establish the best combination of assets that can yield an efficient portfolio