Examining the Portfolio Diversification Benefits with Selected Developed, Emerging and Frontier Markets

Abstract

The financial market integration is important for the investors to have the portfolio diversification of their investment. The investors do the portfolio diversification to the market where they can have higher return with lower risk. The purpose of the paper is to analyse portfolio diversification opportunities among Asian Developed, Emerging and Frontier markets. The study is performed using various methods such as Correlation, Granger causality test, Johansen cointegration test, Portfolio diversification analysis using various diversification strategies. The study examines portfolio diversification opportunities by comparing non-diversified portfolio (home market) with diversified portfolios (Equal Weighted Portfolio, Minimum Variance Portfolio and Maximum Sharpe Portfolio). The gain from the portfolio diversification was also analyzed to measure the benefits of the diversification. The study found that the lack of integration among many markets proves the existence of the portfolio diversification opportunity. Study is unique in a nature that it examines the portfolio diversification benefits for the investors in developed, emerging and frontier markets, as past studies were limited to developed markets only. The study concluded that the investors can gain better return, lower risk and higher Sharpe with portfolio diversification in international market. The researchers can examine in future the portfolio diversification benefits with other frontier and emerging markets for the investors of the developed markets.