Diversification benefits of investments in emerging markets - A Swedish perspective

Sammanfattning: This paper evaluates the possibilities for Swedish investors to diversify their portfolios through investments in emerging market equities. Two different investor profiles are considered, where one seeks to minimize the risk in her portfolio and the other seeks to maximize her risk-adjusted return. We start off by analyzing the return characteristics of a Swedish stock index and an emerging markets index. A set of portfolios are then created based on, and evaluated with, the volatility estimated by the DCC MGARCH model and the Conditional Value-at-Risk. Our findings suggest that the investor seeking to minimize her portfolio risk can enjoy diversification benefits from investments in emerging markets. Conversely, the investor seeking to maximize her risk-adjusted return cannot improve her base portfolio by investing in emerging markets. This implies that investors should consider their ultimate purpose before investing in emerging market equities.