Globally, investors are risk averse hence; they implement strategies aimed at minimizing risk at a given level of returns. Logically, investors would prefer lower risk investments projects given the level of returns. “The study sought to examine the effect of portfolio diversification on financial performance of investment firms listed at the NSE, Kenya. The study adopted descriptive research design. The target population included all 5 listed investment firms as at 31st December 2019. The study was therefore a census survey of all listed investment firms that have been in operation during the study period from 2010 to 2019. The study extracted annual secondary data from audited financial statements and other published data of the concerned listed investment firms. The data was collected for ten years beginning 2010 to 2019. The extracted data was recorded on data collection sheets. Diagnostic tests namely test for normality, autocorrelation and multicollinearity, serial correlation and heteroscedasticity were conducted. The purpose of the tests was to ensure that the regression model adopted is robust. The data was checked for completeness and then keyed into excel 2016. The variables were then generated using different functions in excel. The organized data from excel were exported to STATA version 14 for descriptive and inferential analysis. Descriptive statistics involved frequencies, percentages, mean and standard deviation while inferential statistics comprised of pairwise correlation and multiple regression analysis. Regression analysis aid in establishing the effect of portfolio diversification on financial performance of listed investment firms. The study utilized OLS regression models as shown in equation (1) and (2). The significance of the effect of explanatory variables were conducted at 95% confidence level. The Pearson correlation analysis revealed that the correlation between investment portfolio diversification, firm size, liquidity and financial performance was positive. Analysis of variances showed that investment portfolio diversification, firm size and liquidity had a significant effect on financial performance of financial performance among investment firms listed at the NSE Kenya. Additionally, the regression coefficient revealed that investment portfolio diversification had a positive and significant effect on financial performance of investment firms listed at the NSE Kenya. Firm size had a positive and significant effect on financial performance of investment firms listed at the NSE Kenya. Additionally, liquidity had a positive but statistically insignificant effect on financial performance of investment firms listed at the NSE Kenya. Based on study findings regarding the effect of investment portfolio diversification, the study concludes that the positive effect of investment portfolio diversification on financial performance in model equations (1) & (2) implies that improvement in portfolio diversification leads to improving financial performance of the listed investment firms. Regarding the effect of firm size on financial performance, the study concludes that the positive effect of firm size on financial performance implies that increasing firm size in terms of total assets, leads to improvement of financial performance of listed investment firms. Finally, regarding the effect liquidity on financial performance of listed investment firms in Kenya, the study concludes that the positive effect of liquidity on financial performance can be explained by the fact that firms that have adequate liquidity are able to settle maturing obligation without fail hence. The study makes recommendations. Regarding investment portfolio diversification, the study recommends to management of listed investment firms to diversify their investment portfolio. The firms should broaden their portfolio by addition more assets classes to their portfolios. The study also recommends to capital market authority to regulate and encourage investment of listed investment firms to diversify their investment portfolios. The study recommends to management of listed investment firms to improve their assets through additional investment. The listed investment firms should offer more common stock to the current and prospective shareholders to boost their capital.”

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