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Article
Publication date: 10 November 2020

Florin Aliu, Artor Nuhiu, Besnik A. Krasniqi and Gent Jusufi

This study aims to compare the diversification risk of the crypto portfolio with those of equity portfolios. For this purpose, the hypothetical index was constructed with…

Abstract

Purpose

This study aims to compare the diversification risk of the crypto portfolio with those of equity portfolios. For this purpose, the hypothetical index was constructed with 20 cryptocurrencies that hold the highest market capitalization in the Coin Market Cap database, named as the Crypto-Index 20.

Design/methodology/approach

The portfolio diversification techniques were used to identify risk linked with the six largest European equity indexes and compared with the Crypto-Index 20. Indexes were considered as an independent portfolio while analysis was completed separately for each of them. Data concerning stock prices and their trade volume were collected from the Thomson Reuters Eikon database while crypto prices and their trade volume from the Coin Market Cap database. The diversification risk of the stock indexes was measured separately for each portfolio with the same risk techniques and the same methodological process.

Findings

Research results indicate that Crypto-Index 20 on average was 76 times riskier than FTSE 100, 55 times riskier than FTSE MIB, 44 times riskier than IBEX 35, 10 times riskier than CAC 40 and 9 times riskier than DAX and MDAX. Crypto-Index 20 comprises a stronger positive correlation and is exposed to higher volatility than six selected European equity indexes.

Originality/value

This research provides practical implications for the investors on the diversification benefits and risks attached to the cryptocurrencies portfolio by comparing it with the traditional equity portfolios. From a policy perspective, regulators might obtain information on the risk properties involved into cryptocurrencies and the possibility of creating an optimal portfolio.

Details

Studies in Economics and Finance, vol. 38 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

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Article
Publication date: 15 August 2016

Yi Yang, Tianxu Chen and Lei Zhang

From the attention-based view, the purpose of this paper is to examine how structural autonomy of a corporate venture capital (CVC) program influences its CVC managers…

Abstract

Purpose

From the attention-based view, the purpose of this paper is to examine how structural autonomy of a corporate venture capital (CVC) program influences its CVC managers’ investment decisions with regard to investment portfolio diversification.

Design/methodology/approach

This study collects data from VentureXpert, Compustat, and the US Patent Office. The final sample consists of 868 CVC portfolio-year observations from 1990 to 2004. Panel linear regressions and hierarchical linear regressions are used in the analysis.

Findings

The major finding of this study reveals that that structural autonomy of a CVC program is significantly related to its investment portfolio diversification. In addition to the direct effect, the authors also find that CVC structure autonomy moderates the relationship between corporate investor’s strategic attention and its CVC portfolio diversification. Specifically, when the autonomous level of a CVC program is high, the negative relationship between its parent’s relative growth potentials and CVC portfolio diversification will become positive, and the positive relationship between its parent’s business diversification and CVC portfolio diversification will become negative.

Originality/value

The CVC literature has suggested the impact of CVC portfolio diversification on value creation for corporate investors (e.g. Yang et al., 2014), however, few studies have investigated why some corporate investors diversify their portfolio of venture companies while others do not. To fill such a gap, this study identifies antecedents of CVC portfolio diversification such as CVC structural autonomy and corporate investor’s strategic attention as well as their interactive impacts. The finding also provides valuable managerial implications on CVC program designs.

Details

Journal of Strategy and Management, vol. 9 no. 3
Type: Research Article
ISSN: 1755-425X

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Article
Publication date: 26 August 2014

Mourad Mroua and Fathi Abid

Since equity markets have a dynamic nature, the purpose of this paper is to investigate the performance of a revision procedure for domestic and international portfolios

Abstract

Purpose

Since equity markets have a dynamic nature, the purpose of this paper is to investigate the performance of a revision procedure for domestic and international portfolios, and provides an empirical selection strategy for optimal diversification from an American investor's point of view. This paper considers the impact of estimation errors on the optimization processes in financial portfolios.

Design/methodology/approach

This paper introduces the concept of portfolio resampling using Monte Carlo method. Statistical inferences methodology is applied to construct the sample acceptance regions and confidence regions for the resampled portfolios needing revision. Tracking error variance minimization (TEVM) problem is used to define the tracking error efficient frontiers (TEEF) referring to Roll (1992). This paper employs a computation method of the periodical after revision return performance level of the dynamic diversification strategies considering the transaction cost.

Findings

The main finding is that the global portfolio diversification benefits exist for the domestic investors, in both the mean-variance and tracking error analysis. Through TEEF, the dynamic analysis indicates that domestic dynamic diversification outperforms international major and emerging diversification strategies. Portfolio revision appears to be of no systematic benefit. Depending on the revision of the weights of the assets in the portfolio and the transaction costs, the revision policy can negatively affect the performance of an investment strategy. Considering the transaction costs of portfolios revision, the results of the return performance computation suggest the dominance of the global and the international emerging markets diversification over all other strategies. Finally, an assessment between the return and the cost of the portfolios revision strategy is necessary.

Originality/value

The innovation of this paper is to introduce a new concept of the dynamic portfolio management by considering the transaction costs. This paper investigates the performance of a revision procedure for domestic and international portfolios and provides an empirical selection strategy for optimal diversification. The originality of the idea consists on the application of a new statistical inferences methodology to define portfolios needing revision and the use of the TEVM algorithm to define the tracking error dynamic efficient frontiers.

Details

International Journal of Managerial Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

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Book part
Publication date: 14 December 2018

Ramazan Yildirim and Mansur Masih

The purpose of this chapter is to analyze the possible portfolio diversification opportunities between Asian Islamic market and other regions’ Islamic markets; namely USA…

Abstract

The purpose of this chapter is to analyze the possible portfolio diversification opportunities between Asian Islamic market and other regions’ Islamic markets; namely USA, Europe, and BRIC. This study makes the initial attempt to fill in the gaps of previous studies by focusing on the proxies of global Islamic markets to identify the correlations among those selected markets by employing the recent econometric methodologies such as multivariate generalized autoregressive conditional heteroscedastic–dynamic conditional correlations (MGARCH–DCC), maximum overlap discrete wavelet transform (MODWT), and the continuous wavelet transform (CWT). By utilizing the MGARCH-DCC, this chapter tries to identify the strength of the time-varying correlation among the markets. However, to see the time-scale-dependent nature of these mentioned correlations, the authors utilized CWT. For robustness, the authors have applied MODWT methodology as well. The findings tend to indicate that the Asian investors have better portfolio diversification opportunities with the US markets, followed by the European markets. BRIC markets do not offer any portfolio diversification benefits, which may be explained partly by the fact that the Asian markets cover partially the same countries of BRIC markets, namely India and China. Considering the time horizon dimension, the results narrow down the portfolio diversification opportunities only to the short-term investment horizons. The very short-run investors (up to eight days only) can benefit through portfolio diversification, especially in the US and European markets. The above-mentioned results have policy implications for the Asian Islamic investors (e.g., Portfolio Management and Strategic Investment Management).

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Article
Publication date: 1 January 2021

Hyekyung Yu and Tohyun Kim

This paper investigates how a firm's status moderates the performance of its investment portfolio diversification strategy. We combine the investment diversification

Abstract

Purpose

This paper investigates how a firm's status moderates the performance of its investment portfolio diversification strategy. We combine the investment diversification literature with the organizational status theory, arguing that status would weaken the benefits of a specialist strategy in their niche industry of investments while strengthening the positive consequences of a generalist strategy across various industries.

Design/methodology/approach

We collected our data using the Securities Data Company (SDC) Platinum VentureXpert database. A fixed-effects spline regression analysis for 2,201 US venture capital firms between 1969 and 2016 was used to test for a nonlinear relationship between the level of portfolio diversification and firm performance.

Findings

We found that status differences exist in the performance of a specialist strategy but not in that of a generalist strategy. Our results indicate that portfolio specialization in fewer number of industries has little impact on low-status firms, whereas high-status firms suffer significantly lower IPO success rates. In contrast, above-median portfolio diversification was found to be beneficial to both high- and low-status firms.

Originality/value

We specifically identify the impact of status on the performance of investment diversification strategies, an area of research which has received little attention. Further, our findings provide some practical implications for managers making investment decisions between specialist and generalist investment strategies, given their status within the market. Implications for understanding the roles of firm status in portfolio diversification strategies are discussed.

Details

Journal of Strategy and Management, vol. 14 no. 2
Type: Research Article
ISSN: 1755-425X

Keywords

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Article
Publication date: 7 September 2015

Amari Mouna and Anis Jarboui

The purpose of this paper is to focus on the lack of financial literacy as one probable factor explaining the low levels of portfolio diversification. The authors consider…

Abstract

Purpose

The purpose of this paper is to focus on the lack of financial literacy as one probable factor explaining the low levels of portfolio diversification. The authors consider distinct aspects of financial literacy and control for socioeconomic and behavioral differences among individual groups of investors.

Design/methodology/approach

The proposed models in this paper use multivariate analysis to examine the relationship between financial literacy and portfolio diversification. Investors’ biases have been measured by means of a questionnaire comprising several items, including indicators of investors’ portfolio fragmentation, financial literacy and socio economic variables. The sample consists of 256 small investors actively trading on the Tunisian stock market.

Findings

The results suggest that investors’ experience, financial literacy level, age, their use of the availability heuristic, familiarity bias and portfolio size, have a significant impact on the diversity of assets included their portfolios.

Research limitations/implications

The main limitation of the empirical study is the small size of the sample. A larger sample would have given more reliable results and could have enabled a wider range of analyzes.

Practical implications

The paper encourages investors to make their investments decisions based on their financial capability and experience levels and to avoid relying on their sentiment.

Social implications

The paper encourages governmental organizations to establish training programmes aimed to develop the individual investor’s financial literacy level.

Originality/value

The current study is the first of its kind focusing on the link between financial literacy and portfolio diversification, within the specific context of Tunisia.

Details

International Journal of Bank Marketing, vol. 33 no. 6
Type: Research Article
ISSN: 0265-2323

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Article
Publication date: 2 August 2013

Chonghui Jiang, Yongkai Ma and Yunbi An

The main purpose of this paper is to investigate whether Chinese investors can benefit from international diversification and where these benefits are to be found.

Abstract

Purpose

The main purpose of this paper is to investigate whether Chinese investors can benefit from international diversification and where these benefits are to be found.

Design/methodology/approach

This paper applies an expanding optimization procedure, which is different from the econometric methods or Monte Carlo simulations adopted in many empirical investigations in the literature. The authors' analysis is based on various realized portfolios that are set up at different dates in the sample period.

Findings

Based on a stream of realized portfolios, the authors show that Chinese investors can gain substantially in terms of risk reduction as they venture into foreign markets, regardless of the region into which they choose to diversify and whether in‐sample or out‐of‐sample performance is evaluated. However, the optimal strategies under consideration cannot achieve higher out‐of‐sample expected returns and risk‐adjusted returns than does the domestic investment.

Originality/value

In contrast with those in the literature, the authors' analysis is based on the out‐of‐sample performance of a series of realized optimal portfolios. Their method can address time‐varying correlations that are ignored in most previous research. In addition, this method not only allows them to analyze sizes of diversification benefits but also enables them to examine the major characteristics of international portfolios to gauge the effectiveness of different diversification strategies.

Details

China Finance Review International, vol. 3 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

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Article
Publication date: 17 December 2018

Md Hakim Ali, Md Akther Uddin, Mohammad Ashraful Ferdous Chowdhury and Mansur Masih

On the backdrop of growing importance of Shariah compliant equity markets, the purpose of this paper is to study cross-country portfolio diversification benefits for…

Abstract

Purpose

On the backdrop of growing importance of Shariah compliant equity markets, the purpose of this paper is to study cross-country portfolio diversification benefits for investors with major trading partners of Saudi Arabia, namely, USA, China, Japan, Germany and India, who have already invested or tend to invest in Saudi Arabian stock market.

Design/methodology/approach

The authors have investigated time invariant, dynamic correlations at different investments horizons of the investors among Islamic asset classes by applying relevant econometric techniques like multivariate generalized autoregressive conditional heteroscedastic –DCC and continuous wavelet transforms. For robustness, this study also applied maximal overlap discrete wavelet transform.

Findings

The findings tend to indicate that the Saudi Arabian investors have portfolio diversification benefits with all major trading partners in the short-term investment horizon. Interestingly, Saudi Arabian market has the least portfolio diversification benefits with the Chinese market. However, in the long run, all markets are correlated, yielding minimum portfolio diversification benefits and most importantly Saudi Arabian investors have portfolio diversification benefits with the Indian Islamic equity market in almost all investment horizons. The findings are highly consistent across different econometric technique estimations.

Research limitations/implications

The authors are only considering five major trading partners of Saudi Arabia. Also, the authors are using S&P and FTSE shari’ah index. Moreover, the time period of the study is constrained by the availability of shari’ah indices. Econometric limitations are also well documented in the literature.

Practical implications

The results could be beneficial for the investors, portfolio managers, hedge fund managers and institutional investors and also could be useful for the policy makers in their policy-making decisions.

Originality/value

Only very few studies have looked into the benefits of international portfolio diversification from the perspective of local investors as well as the portfolio diversification benefits with the major trading partners of Saudi Arabia. One of the novelties of the method is to make the stock investors, practitioners and policy makers aware of the portfolio diversification benefits available at different time scales such as 4, 8, 16, 32, 64 and 256 trading days as investment holding periods to unveil the true dynamics of co-movement between those different assets.

Details

Managerial Finance, vol. 45 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 3 April 2017

Mourad Mroua, Fathi Abid and Wing Keung Wong

The purpose of this paper is to contribute to the literature in three ways: first, the authors investigate the impact of the sampling errors on optimal portfolio weights…

Abstract

Purpose

The purpose of this paper is to contribute to the literature in three ways: first, the authors investigate the impact of the sampling errors on optimal portfolio weights and on financial investment decision. Second, the authors advance a comparative analysis between various domestic and international diversification strategies to define a stochastic optimal choice. Third, the authors propose a new methodology combining the re-sampling method, stochastic optimization algorithm, and nonparametric stochastic dominance (SD) approach to analyze a stochastic optimal portfolio choice for risk-averse American investors who care about benefits of domestic diversification relative to international diversification. The authors propose a new portfolio optimization model involving SD constraints on the portfolio return rate. The authors define a portfolio with return dominating the benchmark portfolio return in the second-order stochastic dominance (SSD) and having maximum expected return. The authors combine re-sampling procedure and stochastic optimization to establish more flexibility in the investment decision rule.

Design/methodology/approach

The authors apply the re-sampling procedure to consider the sampling error in the optimization process. The authors try to resolve the problem of the stochastic optimal investment strategy choice using the nonparametric SD test by Linton et al. (2005) based on sub-sampling simulated p values. The authors apply the stochastic portfolio optimization algorithm with SSD constraints to define optimal diversified portfolios beating benchmark indices.

Findings

First, the authors find that reducing sampling error increases the dominance relationships between different portfolios, which, in turn, alters portfolio investment decisions. Though international diversification is preferred in some cases, the study’s results show that for risk-averse US investors, in general, there is no difference between the diversification strategies; this implies that there is no increase in the expected utility of international diversification for the period before and after the 2007-2008 financial crisis. Nevertheless, the authors find that stochastic diversification in domestic, global, and Europe, Australasia, and Far East markets delivers better risk returns for the US risk averters during the crisis period.

Originality/value

The originality of the idea in this paper is to introduce a new methodology combining the concept of portfolio re-sampling, stochastic portfolio optimization with SSD constraints, and the nonparametric SD test by Linton et al. (2005) based on subsampling simulated p values to analyze the impact of sampling errors on optimal portfolio returns and to investigate the problem of stochastic optimal choice between international and domestic diversification strategies. The authors try to prove more coherence in the portfolio choice with the stochastically and the uncertainty characters of the paper.

Details

American Journal of Business, vol. 32 no. 1
Type: Research Article
ISSN: 1935-5181

Keywords

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Article
Publication date: 17 May 2011

Claudio Giannotti, Gianluca Mattarocci and Luca Spinelli

The purpose of this paper is to study whether geographic and sector diversification allow for a significant reduction in the risk exposure of a portfolio of hotel…

Abstract

Purpose

The purpose of this paper is to study whether geographic and sector diversification allow for a significant reduction in the risk exposure of a portfolio of hotel investments in one of the major tourist markets, the Italian market.

Design/methodology/approach

This paper evaluates the benefits related to a Markowitz diversification approach for the construction of a specialised portfolio in the hotel real estate market. The portfolio analysis considers the degree of efficiency of each portfolio, the type of diversification adopted by a more efficient portfolio, the persistence of results over time and the impact of diversification constraints.

Findings

The results demonstrate that, while standard geographic and sector diversification allow for good results, the more efficient portfolios are more concentrated. The trade‐off is worse if some concentration constraints are established, but the portfolios identified are characterised by higher performance persistence.

Research limitations/implications

The analysis only considers high‐quality hotels in the Italian market. Unfortunately, some information on costs is not as detailed as would be desired. The availability of a more complete database could increase the significance of the results obtained.

Practical implications

The results are relevant for constructing all hotels' portfolios, like those managed by a real estate fund manager, in order to define the type and degree of diversification that allow for minimal risk exposure.

Originality/value

This paper is the first to apply the Markowitz theory to the Italian hotel industry in order to identify the best diversification criteria.

Details

EuroMed Journal of Business, vol. 6 no. 1
Type: Research Article
ISSN: 1450-2194

Keywords

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