Is the Diversification Benefit of Frontier Markets Realizable by Mean-Variance Investors? The Evidence of Investable Funds
Posted: 9 Jun 2014 Last revised: 6 Mar 2015
Date Written: August 29, 2012
We investigate whether the diversification benefits of frontier markets may be realized by mean-variance investors. In contrast to other studies, we focus on a set of investable frontier exchange-traded funds (ETFs) and mutual funds. Our analysis includes direct measurement of the economic benefits of frontier market diversification, as well as consideration of frontier market trading dynamics. We find that frontier market investing improves portfolio risk-return properties, that frontier funds offer diversification benefits in a mean-variance context, and that frontier fund volatility is driven by idiosyncratic factors. We also provide empirical evidence covering the most extensive set of 32 frontier markets that are in line with expanded frontier market classifications.
Keywords: Frontier markets, International diversification, Mutual funds, ETFs
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