What is the impact on risk and return of including microfiance investment funds in a diversified portfolio?

Abstract

The aim of this thesis is to compare the risk-return profile of an investor investing in a portfolio including microfinance investment funds to a benchmark portfolio. To do this we will apply the mean-variance model of Markowitz on ETFs to construct portfolio in a first step including two different microfinance funds in the initial portfolio separately and in a second step including them together. We use the Sharpe ratio and the Treynor ratio as the risk-adjusted ratio to compare the risk-return characteristics of each portfolio. The result is that by including LMDF in the portfolio LMDF seems to be an interesting investment opportunity that reduces the overall risk of the portfolio despite a slight decrease in expected return and at the same time provides diversification within the portfolio. It also appears that the addition of LMDF and Triodos together reduces the risk even more than LMDF alone but also slightly reduces the expected return as does the addition of LMDF alone.