International portfolio diversification : a factor analysis approach

This study looks at international p01tfolio diversification of the Asia-Pacific, and is based on indices or averages of six stock exchanges - Australian Stock Exchange, Stock Exchange of Hong Kong, Toh.yro Stock Exchange, Kuala Lumpur Stock Exchange, Stock Exchange of Singapore, and New York Stock Exchange. The Australia All-Industries Index, the Hang Seng Index, the Nikkei Stock Average (Nikkei-225), the Kuala Lumpur Composite Index, the SES AllSingapore Share Index and the Dow Jones Industrial Average are used in the statistical analysis, recognising the fact that stock indices and averages are widely used to monitor performance of stock markets. Factor Analysis is the main tool used to analyse the data. From here, two main factors are identified from the exchange rate-adjusted rate of returns of indices or averages. The fu·st factor relates to emerging markets and the second pertains to established markets. Given the six markets chosen, an efficient portfolio should consist of one emerging market (Singapore, Malaysia or Hong Kong) and one established market being the New York stock market. The results of the analysis support international portfolio diversification as a means of reducing risk. The project also confums the presence of intertemporal stability of the variables and this indicates the efficacy of factor analysis as a guide to future international diversification decisions. The exact portfolio to be undertaken by an investor is, however, dependent on his/her risk-return preference.ACCOUNTANC