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Portfolio Diversification Benefits between Financial Markets of the US and China: Empirical Evidence from two Alternative Methods

Author

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  • Hatemi-J, Abdulnasser

    (Department of Accounting and Finance, UAE University, United Arab Emirates)

  • Taha, Viyan

    (Department of Finance and Banking, Duhok University, Kurdistan Region, Iraq)

Abstract

This article investigates empirically whether or not there are benefits from international portfolio diversification between financial markets of the US and China. In addition to the seminal approach of Markowitz (1952) that yields the optimal budget shares for minimizing the risk, we also make use of the new approach developed by Hatemi-J and El-Khatib (2015) that provides the optimal weights by maximizing the risk adjusted return of the underlying portfolio. In both cases, it is found that the investors can reduce the unsystematic risk of their portfolio by international diversification with respect to these two largest financial markets in the world. The risk adjusted return of the portfolio that combines risk and return is higher compared to the risk adjusted return of the portfolio created by the standard approach. Furthermore, it is found that the highest budget share in the optimal portfolio belongs to the US market regardless of the estimation method. I benefici della diversificazione del portafoglio tra i mercati finanziari di USA e Cina: evidenze empiriche da due metodi alternativi Questo articolo analizza empiricamente se la diversificazione internazionale del portafoglio tra i mercati finanziari di USA e Cina porta a dei benefici. Oltre all’approccio miliare di Markowitz (1952) che fornisce le quote ottimali del portafoglio che minimizzano il rischio, utilizziamo anche il nuovo modello sviluppato da Hatemi-J e El-Khatib (2015) che calcola i pesi ottimali massimizzando il rendimento, corretto per il rischio, del portafoglio considerato. In entrambi i casi si è riscontrato che gli investitori possono ridurre il rischio non-sistematico del portafoglio tramite la diversificazione internazionale in riferimento ai due maggiori mercati finanziari mondiali. Il rendimento risk-adjusted del portafoglio che combina il rischio e il rendimento è più alto di quello del portafoglio creato tramite l’approccio standard. Inoltre, viene evidenziato che le maggiori quote nel portafoglio ottimale appartengono al mercato americano indipendentemente dal metodo usato.

Suggested Citation

  • Hatemi-J, Abdulnasser & Taha, Viyan, 2021. "Portfolio Diversification Benefits between Financial Markets of the US and China: Empirical Evidence from two Alternative Methods," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 74(4), pages 537-546.
    • Handle: RePEc:ris:ecoint:0910
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    1. repec:bla:scandj:v:94:y:1992:i:4:p:581-88 is not listed on IDEAS
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    Cited by:

    1. Hatemi-J, Abdulnasser & El-Khatib, Youssef, 2023. "The Dividend Discount Model with Multiple Growth Rates of any Order for Stock Evaluation," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 76(1), pages 135-146.

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    More about this item

    Keywords

    Portfolio Diversification; The US; China; Risk and Return;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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