International Portfolio Diversification Benefits: An Empirical Investigation of the 28 European Stock Markets During the Period 2014–2024

Zaimovic Azra (), Arnaut-Berilo Almira () and Bešlija Rijad ()
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Zaimovic Azra: PhD, Full professor, University of Sarajevo – School of Economics and, Business, Trg Oslobodjenja – Alija Izetbegovic 1, 71000 Sarajevo, Bosnia and Herzegovina
Arnaut-Berilo Almira: PhD, Full professor, University of Sarajevo – School of Economics and Business, Sarajevo, Bosnia and Herzegovina
Bešlija Rijad: MA, Specialist for Retail Risk Reporting and Analysis, Raiffeisen Bank d.d. Bosnia and Herzegovina, Sarajevo, Bosnia and Herzegovina

South East European Journal of Economics and Business, 2024, vol. 19, issue 1, 96-112

Abstract: This study investigates the benefits of international diversification in the stock markets of the 28 European countries (the EU and the UK) over two five-year periods: a stable period from 2014 to 2019 and a turbulent period from 2019 to 2024. The analysis draws on the Markowitz mean-variance, Sharpe reward-to-variability, and naive diversification models, based on which different investment strategies were developed and implemented. We find that actively managed portfolios perform significantly better than naively diversified portfolios. The analyzed markets exhibit positive short-term associations, with an average correlation coefficient of 0.29 in the first period and 0.46 in the second period. However, these markets do not show long-term cointegration. Recent crises have reduced diversification benefits, yet significant opportunities for diversification remain. Diversification benefits are almost halved in the second period: average single-market standard deviation can be reduced by 60.5% with investments in 20-indices portfolios in the stable period, and only by 33.7% with the same portfolio size in the turbulent period.

Keywords: International Diversification; Systematic Risk; Crisis; Covid-19 Pandemic; EU and UK Stock markets; Sharpe Ratio; Markowitz Portfolio Theory; Naive Diversification; Investment Strategies (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:seejeb:v:19:y:2024:i:1:p:96-112:n:1007

DOI: 10.2478/jeb-2024-0007

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