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Corresponding Author:
Abdulnasser Hatemi-J, Department of Accounting and Finance, College of Business and Economics, UAE University, Al Ain, The United Arab Emirates

Coauthors:
Viyan Taha, Department of Finance and Banking, Duhok University, Kurdistan Region, Iraq

Portfolio Diversification Benefits between Financial Markets of the US and China: Empirical Evidence from two Alternative Methods

Volume 74 - Issue 4, November 2021
(pp. 537-546)
JEL classification: C60, G10, G12
Keywords: Portfolio Diversification, The US, China, Risk and Return

Abstract

This article investigates empirically whether or not there are benefits from international portfolio diversification between financial markets of the US and China. In addition to the seminal approach of Markowitz (1952) that yields the optimal budget shares for minimizing the risk, we also make use of the new approach developed by Hatemi-J and El-Khatib (2015) that provides the optimal weights by maximizing the risk adjusted return of the underlying portfolio. In both cases, it is found that the investors can reduce the unsystematic risk of their portfolio by international diversification with respect to these two largest financial markets in the world. The risk adjusted return of the portfolio that combines risk and return is higher compared to the risk adjusted return of the portfolio created by the standard approach. Furthermore, it is found that the highest budget share in the optimal portfolio belongs to the US market regardless of the estimation method.

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Portfolio Diversification Benefits between Financial Markets of the US and China: Empirical Evidence from two Alternative Methods

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Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
of the Genoa Chamber of Commerce