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The contribution of emerging markets in international diversification strategies

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  • Theodor Kohers
  • Gerald Kohers
  • Vivek Pandey

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.

Suggested Citation

  • Theodor Kohers & Gerald Kohers & Vivek Pandey, 1998. "The contribution of emerging markets in international diversification strategies," Applied Financial Economics, Taylor & Francis Journals, vol. 8(5), pages 445-454.
    • Handle: RePEc:taf:apfiec:v:8:y:1998:i:5:p:445-454
    DOI: 10.1080/096031098332736
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    Cited by:

    1. Phengpis, Chanwit & Swanson, Peggy E., 2004. "Increasing input information and realistically measuring potential diversification gains from international portfolio investments," Global Finance Journal, Elsevier, vol. 15(2), pages 197-217, August.
    2. Salehizadeh, Mehdi, 2003. "U.S. multinationals and the home bias puzzle: an empirical analysis," Global Finance Journal, Elsevier, vol. 14(3), pages 303-318, December.
    3. Abraham Ramos-Torres & Laura N. Montoya, 2024. "Evaluating Investment Risks in LATAM AI Startups: Ranking of Investment Potential and Framework for Valuation," Papers 2410.03552, arXiv.org.
    4. Camilleri, Silvio John & Galea, Gabriella, 2009. "The Diversification Potential Offered by Emerging Markets in Recent Years," MPRA Paper 62491, University Library of Munich, Germany.
    5. Sirr, Gordon & Garvey, John & Gallagher, Liam, 2011. "Emerging markets and portfolio foreign exchange risk: An empirical investigation using a value-at-risk decomposition technique," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1749-1772.
    6. Ely, David & Salehizadeh, Mehdi, 2001. "American depositary receipts: An analysis of international stock price movements," International Review of Financial Analysis, Elsevier, vol. 10(4), pages 343-363.
    7. Moreno, David & Olmeda, Ignacio, 2007. "Is the predictability of emerging and developed stock markets really exploitable?," European Journal of Operational Research, Elsevier, vol. 182(1), pages 436-454, October.

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