Dynamic Investment Strategies With and Without Emerging Equity Markets

Abstract

This study examines the geometric returns of and investment strategies governing portfolios of stocks and bonds with and without allocations to emerging equity markets. We apply the discrete-time dynamic investment model that allows all moments of the return distribution to affect the analysis. This is important given that earlier studies have found that emerging market returns tend to be non-normally distributed. Our principal findings are that risk-tolerant investors may achieve substantially higher capital growth by actively diversifying into emerging equity markets, this being achieved only at the expense of higher risk. Overall, the results suggest that the gains accrued from diversifying into emerging equity markets are modest, and that they only originated from high emerging equity market returns over a relatively short time at the beginning of the sample period.