The Effect of Sectoral Diversification on Return and Risk in Portfolio Management: An Application in Borsa Istanbul

Abstract

This paper investigates sectoral diversification within Borsa Istanbul, aiming to elucidate its impact on portfolio risk and return dynamics. Spanning the timeframe from 2020 to 2022, the study meticulously analyzes stocks from pivotal sectors, including banking, energy, and iron and steel. Employing a robust methodology, the research harnesses Monte Carlo simulations to generate many hypothetical portfolios, subsequently evaluating them on the Efficient Frontier to identify optimal risk-return trade-offs. Key performance metrics, such as the Sharpe Ratio, Sortino Ratio, and Maximum Drawdown, further enrich the analysis, providing a granular view of portfolio behaviors. The significance of this study lies in its bridging of theoretical constructs of diversification with the tangible realities of an emerging market like Borsa Istanbul. Our main findings underscore the potential benefits of sectoral diversification while highlighting the complexities inherent in portfolio construction. The insights gleaned offer valuable guidance for investors, emphasizing the delicate balance between risk mitigation and return optimization in a diversified portfolio.