Testing Modern Portfolio Theory: Diversification and Performance of a Video Game Industry Portfolio

Abstract

This thesis serves as a pilot study to examine the feasibility of building a well-diversified portfolio in the video game industry. The thesis constructs two portfolios, one composed entirely of video game industry companies and the other a well-diversified portfolio constructed with the doctrine of Modern Portfolio Theory. The metrics developed in Modern Portfolio Theory are employed to test the thesis. Two specific questions in the thesis are: (1) the possibility for the video game industry to be diverse, and (2) the possibility of the video game industry portfolio to outperform a well-diversified portfolio. The first part of the thesis question is examined by using correlation to represent diversification. The second part of the thesis question is examined through the calculation and use of three key performance measures that emerged from Modern Portfolio Theory: the Sharpe Ratio, Treynor Ratio, and Jensen’s Alpha.