Portfolio Diversification in the South-East European Equity Markets

Zaimovic Azra (), Arnaut-Berilo Almira () and Mustafic Arnela ()
Additional contact information
Zaimovic Azra: Associate professor, Sarajevo School of Economics and Business, University of Sarajevo
Arnaut-Berilo Almira: Assistant professor, Sarajevo School of Economics and Business, University of Sarajevo
Mustafic Arnela: Sarajevo School of Economics and Business, University of Sarajevo

South East European Journal of Economics and Business, 2017, vol. 12, issue 1, 126-135

Abstract: Diversification potential enables investors to manage their risk and decrease risk exposure. Good diversification policy is a safety net that prevents a portfolio from losing its value. A well-diversified portfolio consists of different categories of property with low correlations, while highly correlated markets have the feature of low possibilities for diversification. The biggest riddle in the world of investments is to find the optimal portfolio within a set of available assets with limited capital. There are numerous studies and mathematical models that deal with portfolio investment strategies. These strategies take advantage of diversification by spreading risk over several financial assets. Modern portfolio theory seeks to find the optimal model with the best results. This paper tries to identify relationships between returns of companies traded in South-East European equity markets. A Markowitz mean-variance (MV) portfolio optimization method is used to identify possibilities for diversification among these markets and world leading capital markets. This research also offers insight into to the level of integration of South-East European equity markets. Principal component analysis (PCA) is used to determine components that describe the strong patterns and co-movements of the dataset. Finally, we combined MV efficient frontier and equity, which represent PCA components, to draw conclusions. Our findings show that PC analysis substantially simplifies asset selection process in portfolio management. The results of the paper have practical applications for portfolio investors.

Keywords: Diversification; Stock Markets; Markowitz portfolio optimization theory; Principal component analysis (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/jeb-2017-0010 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vrs:seejeb:v:12:y:2017:i:1:p:126-135:n:10

DOI: 10.1515/jeb-2017-0010

Access Statistics for this article

South East European Journal of Economics and Business is currently edited by Adnan Efendic, Vesna Babić-Hodović and Aziz Šunje

More articles in South East European Journal of Economics and Business from Sciendo
Bibliographic data for series maintained by Peter Golla ().