An investigation into the relevance of international portfolio diversification from a South African perspective

Abstract

Diversification is one of the more familiar concepts in finance because of its ability to curtail risk towards investors. However, for diversification to be efficient, the assets combined should have inversely related price movements. In the same light, previous research done on international portfolio diversification has consistently found that having investments diversified across different global markets that have low to medium correlations helps to get as close to an optimal portfolio as possible. However, previous research also indicates that both global financial integration and exogenous shocks increase correlations among international markets, hence negating the benefits of international portfolio diversification to an extent. Therefore, with global integration on the rise, coupled with economic and political instability in some BRICS nations, the research examines these factors and gauges the current viability of international portfolio diversification from the perspective of a South African investor.