Abstract
Sector investing aims to guide investors in identifying undervalued securities. Knowing which sectors flourish at different phases of the business cycle, investment returns may be boosted by increa...
Highlights
Emerging markets tend to differ considerably from developed markets in numerous ways
To determine the correct amount and weight assigned to each security, the investor can implement a mean-variance optimisation strategy (e.g. Max Sharpe)
A discussion was presented on the different performance measures that have been developed on the basis of portfolio theory and the Capital Asset Pricing Model (CAPM)
Summary
Emerging markets tend to differ considerably from developed markets in numerous ways. From the mean-variance model, Roy (1952) found certain drawbacks through considering what the implications of reducing the upper bound of the chance of losses would be if the information available was restricted to the first- or secondorder moments This assumes that investors are not as concerned as to how security prices deviate from a profitable mean but are rather set on avoiding the probability of incurring future losses (Roy, 1952:431). Markowitz (1959) responded to this by developing a semi-variance measure that accounts for the downside risk and was to be included in future portfolio selections This inspired authors such as Bawa (1975) and Fishburn (1977) in the development of the Lower Partial Moments (LPM) approach that will consider different nth moments of downside. The question, is not whether sector rotation is a superior investment strategy, but rather to determine which of the sectors proposed by Stovall (1995) are still the most optimal investment sectors when applied to South African markets and are still profitable when compared with market benchmarks
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