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Risk Management and Portfolio Diversification
Contrary to conventional wisdom, there is no evidence that banks can, or have ever been able to, easily form portfolios containing negligible exposure to unsystematic risk. Since well-diversified portfolios are the bedrock upon which so much financial theory has been built upon. However, studies carried on such topic in the Mauritian context are scant. Therefore this paper aims at filling this gap and examines the degree to which the Mauritian banks uses risk management practices and techniques in dealing with different types of risk. The paper also investigates when Mauritian banks diversify their portfolios, do they reduce their risk exposures. A modified questionnaire has been developed and is divided into two parts, covering the six aspects of risk management techniques and the remaining six aspects concerning portfolio diversification. Data was freshly collected, using the Statistical Package for the Social Sciences Software, specifically the Cronbachs Alpha, the Pearsons Correlation Coefficients, one-way ANOVA and OLS estimates. This study has found that the three most important risks facing the Mauritian banks are market risk followed by operational risk, and credit risk. The Mauritian banks are somewhat efficient in managing risk through diversification of portfolios. Finally, the results indicate that there is a significant difference between the variables concerning whether to diversify locally or internationally. This proves that both can be used as a tool for risk management practices but there is a need to stress on foreign exchange exposures depending on the banks risk appetite.