Portfolio diversification : a pragmatic approach for local investors.

As world equity markets liberalize over time, investors are being offered an ever increasing number of investment opportunities. Investors can now choose from a wider selection of stocks from more markets. According to Markorwitz, pioneer of the Portfolio Theory, this enables global investors to increase their overall portfolio returns, or decrease their overall exposure to risks or both, as in most cases. Also, investors can construct and maintain portfolios to better match their risk preferences. For example, risk preferring investors may choose to commit more funds to volatile emerging markets. In view of the possible benefits, we hope that our study can provide investors with a no-frills approach to diversification by building on the research work of other academics and making certain reasonable assumptions. In our study, cluster plots, factor analysis, bar plots and correlation matrices are used to examine the behavior and characteristics of the six emerging equity markets (Singapore, Malaysia, Hong Kong, Taiwan, Thailand and South Korea), the correlation amongst them and to determine the relative weights of diversification. From the analysis, we discovered that these six markets have low correlation with one another. Thus, diversifying in emerging markets will reap benefits in the form of a more efficient portfolio.ACCOUNTANC