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Oops, we should have diversified!

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  • Shamila Jayasuriya
  • William Shambora

Abstract

This article extends the research on the improvements to the efficient portfolio frontier in globally diversified portfolios. We examine efficient frontiers of regional equity portfolios from developed and undeveloped countries. We show that a globally diversified portfolio has higher reward with less risk than individual regional portfolios. We also show that, in the past 8 years, a US investor would have achieved higher returns for the same risk if diversified in emerging and frontier markets. These results have implications for practical portfolio selection as well as empirical applications of Capital Asset Pricing Model (CAPM).

Suggested Citation

  • Shamila Jayasuriya & William Shambora, 2009. "Oops, we should have diversified!," Applied Financial Economics, Taylor & Francis Journals, vol. 19(22), pages 1779-1785.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:22:p:1779-1785
    DOI: 10.1080/09603100903035947
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    1. repec:ipg:wpaper:2013-034 is not listed on IDEAS
    2. Ngene, Geoffrey & Post, Jordin A. & Mungai, Ann N., 2018. "Volatility and shock interactions and risk management implications: Evidence from the U.S. and frontier markets," Emerging Markets Review, Elsevier, vol. 37(C), pages 181-198.
    3. repec:ipg:wpaper:34 is not listed on IDEAS
    4. Hourani, Alya & Wang, Yan & Demiralay, Sercan & McGroarty, Frank, 2023. "Industry costs of equity: Evidence from frontier markets," International Review of Financial Analysis, Elsevier, vol. 87(C).
    5. Amanjot Singh & Manjit Singh, 2018. "Co-movement among US, Frontier and BRIC Equity Markets after the Financial Crisis," Global Business Review, International Management Institute, vol. 19(2), pages 311-327, April.
    6. Wahbeeah Mohti & Andreia Dionísio & Paulo Ferreira & Isabel Vieira, 2019. "Frontier markets’ efficiency: mutual information and detrended fluctuation analyses," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(3), pages 551-572, September.
    7. SENGA, Christian, 2018. "Portfolio optimization at the frontier: Assessing the diversification benefits of African securities," Working Papers 2019001, University of Antwerp, Faculty of Business and Economics.
    8. Cagliesi, Gabriella & Guidi, Francesco, 2021. "A three-tiered nested analytical approach to financial integration: The case of emerging and frontier equity markets," International Review of Financial Analysis, Elsevier, vol. 74(C).
    9. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2013. "Liquidity measurement in frontier markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 1-12.
    10. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2015. "Frontier market transaction costs and diversification," Journal of Financial Markets, Elsevier, vol. 24(C), pages 1-24.
    11. Berger, Dave & Pukthuanthong, Kuntara & Jimmy Yang, J., 2011. "International diversification with frontier markets," Journal of Financial Economics, Elsevier, vol. 101(1), pages 227-242, July.
    12. Mohti, Wahbeeah & Dionísio, Andreia & Vieira, Isabel & Ferreira, Paulo, 2019. "Regional and global integration of Asian stock markets," Research in International Business and Finance, Elsevier, vol. 50(C), pages 357-368.
    13. Thomas, Nisha Mary & Kashiramka, Smita & Yadav, Surendra Singh & Paul, Justin, 2022. "Role of emerging markets vis-à-vis frontier markets in improving portfolio diversification benefits," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 95-121.
    14. Tienyu Hwang & Simon Gao & Heather Owen, 2014. "Markowitz efficiency and size effect: evidence from the UK stock market," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 721-750, November.
    15. Anissa Chaibi & Mathieu Gomes, 2013. "Volatility Spillovers Between Oil Prices and Stock Returns: A Focus on Frontier Markets," Working Papers 2013-34, Department of Research, Ipag Business School.

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