The contribution of emerging markets in international diversification strategies

Theodor Kohers, Gerald Kohers and Vivek Pandey

Applied Financial Economics, 1998, vol. 8, issue 5, 445-454

Abstract: New investment opportunities provided by emerging markets have intrigued investors striving to obtain a better risk - return combination for their international portfolios. With this expanded opportunity set, however, come some important questions: to take full advantage of international diversification benefits in a growing global market arena, must investors design comprehensive portfolios involving numerous countries and complex weighting schemes or do smaller portfolios using simplified weighting strategies perform as well? Furthermore, are emerging markets really a valuable component of these internationally diversified portfolios, or is an investor better off avoiding these markets in favour of the more established developed markets? Using theoretical portfolios which incorporate emerging markets to different extents and which reflect varying degrees of portfolio breadth and different weighting schemes, this study finds that the incremental benefits of broad-scale diversification efforts using complex weighting strategies is small. Furthermore, in these relatively small, yet well-performing portfolios, emerging markets play a critical role. Overall, equally weighted portfolios which include some emerging markets that have positive economic forecasts and low correlations with the other countries in the portfolio can provide diversification benefits which are comparable to portfolios with more breadth and more complex weighting schemes.

Date: 1998
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DOI: 10.1080/096031098332736

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