Optimal Portfolio Construction Under Market Inefficiency: The Role of Firm Size and Financial Leverage in Iraq

Atheer Hadi Obaid Al-Sagri; Mohammed Faez Hasan

doi:10.63540/kijme.v13i48.4837

Authors

Atheer Hadi Obaid Al-Sagri University of Warith Al-Anbiya https://orcid.org/0009-0001-4647-0134
Mohammed Faez Hasan College of Administration and Economics, University of Kerbala https://orcid.org/0000-0002-4579-3214

DOI:

https://doi.org/10.63540/kijme.v13i48.4837

Keywords:

Firm Size, Financial Leverage , Optimal Portfolio Performance , Markowitz Portfolio Model , Portfolio Performance Evaluation Indicators

Abstract

This research investigates the influence of the size of a company and of the company’s debt (leverage) on how investment portfolios perform on the Iraqi Stock Exchange. To accomplish this, investment portfolios were constructed using size and leverage classifiable monthly data over time. These were analyzed using a number of different metrics to determine portfolio performance such as monthly returns, portfolio beta, the Sharpe and Treynor ratios, Jensen’s alpha, and the information ratio. A quantitative approach using the Generalized Estimation Equations (GEE) model was used for the analysis to determine performance differentials among the sub-portfolios as opposed to the sample portfolio; the sample portfolio served as a baseline for the analysis. The analysis noted that the portfolios that were large and had lower debt (leverage) were, on average, of a higher performance and that that performance was more stable over time relative to other portfolios and the sample portfolio. The findings thus suggest that, for portfolios of large size, marginal debt levels facilitate the attainment of superior performance. The indicator analysis also confirmed that Jensen’s alpha was the most effective metric to identify and confirm performance differentiation, likely due to that performance being superior. To improve portfolio performance efficiency within a volatile economy, the study encourages investment strategies that reduce portfolio leverage focused on large company stock for portfolio managers and investors on the Iraqi Stock Exchange.

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Author Biographies

Atheer Hadi Obaid Al-Sagri, University of Warith Al-Anbiya

Department of Administrative and Financial Affairs

Mohammed Faez Hasan, College of Administration and Economics, University of Kerbala

Financial and Banking Dept., Management and Economics, University of Kerbala, Iraq.

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