Portfolio diversification: A factor analysis approach

Abstract

One of the main purposes of modern portfolio theory is to deal with the merit of international diversification, which is closely linked to the issue of co-movement and interdependence between stock markets. The globalization of equity markets and the increasing growth potential of the emerging Asian markets in the recent years have attracted significant attention in their co-movements. This study aims to investigate the potential of diversifying into US and Asia Pacific markets in the perspective of a Singaporean investor. A factor analysis is first used to screen out certain stock markets before the portfolio is computed. In view of the recent Asian financial crisis in mid-1997, the study is also extended to include international diversification choices after the Asian crisis to provide a more comprehensive study for Singaporean investors. The idea of this research can be repeated from a different perspective such as the US point of view. © 2005 Taylor & Francis.