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Portfolio Diversification in the South-East European Equity Markets

Author

Listed:
  • Zaimovic Azra

    (Associate professor, Sarajevo School of Economics and Business, University of Sarajevo)

  • Arnaut-Berilo Almira

    (Assistant professor, Sarajevo School of Economics and Business, University of Sarajevo)

  • Mustafic Arnela

    (Sarajevo School of Economics and Business, University of Sarajevo)

Abstract

Diversification potential enables investors to manage their risk and decrease risk exposure. Good diversification policy is a safety net that prevents a portfolio from losing its value. A well-diversified portfolio consists of different categories of property with low correlations, while highly correlated markets have the feature of low possibilities for diversification. The biggest riddle in the world of investments is to find the optimal portfolio within a set of available assets with limited capital. There are numerous studies and mathematical models that deal with portfolio investment strategies. These strategies take advantage of diversification by spreading risk over several financial assets. Modern portfolio theory seeks to find the optimal model with the best results. This paper tries to identify relationships between returns of companies traded in South-East European equity markets. A Markowitz mean-variance (MV) portfolio optimization method is used to identify possibilities for diversification among these markets and world leading capital markets. This research also offers insight into to the level of integration of South-East European equity markets. Principal component analysis (PCA) is used to determine components that describe the strong patterns and co-movements of the dataset. Finally, we combined MV efficient frontier and equity, which represent PCA components, to draw conclusions. Our findings show that PC analysis substantially simplifies asset selection process in portfolio management. The results of the paper have practical applications for portfolio investors.

Suggested Citation

  • Zaimovic Azra & Arnaut-Berilo Almira & Mustafic Arnela, 2017. "Portfolio Diversification in the South-East European Equity Markets," South East European Journal of Economics and Business, Sciendo, vol. 12(1), pages 126-135, April.
    • Handle: RePEc:vrs:seejeb:v:12:y:2017:i:1:p:126-135:n:10
    DOI: 10.1515/jeb-2017-0010
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    References listed on IDEAS

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    More about this item

    Keywords

    Diversification; Stock Markets; Markowitz portfolio optimization theory; Principal component analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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