To assess the diversification performance of emerging market equity portfolios

Abstract

Portfolio diversification in respect of emerging equity markets is of major interest to academia and professionals alike. Central to this portfolio diversification interest is the choice between the different emerging markets as well as the respective weights of the constituents of the portfolio. In particular, this study focused on South Africa as the preferred emerging equity market source of investment diversification. The estimated and implied returns of the individual indices were computed from monthly index prices in order to obtain optimal portfolio returns. By maximising the Sharpe ratio of a portfolio through different weights of the individual indices, a portfolio optimisation tool was used to obtain the optimal portfolio and the diversification benefits throughout the studied period. The findings were that emerging equity markets provide significant diversification benefits and that Morocco and Jordan are the most dominant emerging equity markets. Additionally, although the South African market index does provide diversification benefits, it does not feature in the optimal portfolio and it is not the most ideal emerging equity market for diversification purposes. Moreover, the diversification benefits differ depending on the weights of the developed and emerging equity markets within the portfolio and throughout the studied period