Investment in Microfinance Equity: Risk, Return, and Diversification Benefits

This paper draws a global picture of worldwide microfinance equity from the viewpoint of a profit-oriented investor. It draws information from daily quoted prices of microfinance stocks from their issuance.

The paper conducts microfinance country equity indices. It analyzes changes in these indices, which it assesses in reference to comparable indices for the financial sector and also to national indices.

The paper also examines whether adding microfinance to international asset portfolios improves the investor's risk-return performance. Findings indicate that:

• Microfinance has resumed its close correlation with the financial sector since 2001;
• Estimations of the Capital Asset Pricing Model demonstrate that microfinance shares exhibit higher market beta than conventional financial institutions, and have equivalent currency exposure;
• While inclusion of microfinance equity has been a major source of diversification in the 1990s, its impact has diminished in recent years;
• Optimal portfolios invested in countries where microfinance equity is available may contain up to 20 percent of stocks from MFIs.