Portfolio Diversification in the European Union: A Country Beta Approach

Abstract

This abstract was created post-production by the JFI Editorial Board.

This research study explores the opportunities for investment diversification in EU (European Union) stock markets. Prior co-integration tests on stock markets of France and the ten new members of the Union found that the stock markets are not yet integrated. The lack of integration among the 25 EU stock markets offers an opportunity for investors in and outside of EU to diversify and reduce risk. This paper implements Naidu-Choudhury approach of country beta to construct portfolios in EU for French, German, and British investors and examine their performance using Sharpe's Index. The results, based on performance measure, indicate that Naidu-Choudhury approach (country-beta based) is superior to Markowitz approach (correlation based) for all three markets; namely France, German, and Britain. Moreover, Naidu-Choudhury approach produced a portfolio that has positive risk-adjusted return.