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Political Risk and the Benefits of International Portfolio Diversification

Listed author(s):
  • Jean-Claude Cosset

    (Université Laval)

  • Jean-Marc Suret

    (Université Laval)

Registered author(s):

    This paper examines the benefits of portfolio investment in the stock markets of politically risky countries by evaluating the effects of political risk constraints on the performance of a portfolio of international stocks. We use monthly data on political risk ratings and stock returns for a sample of thirty-six countries from April 1982 to December 1991. Ex-post and ex-ante portfolio selection strategies are developed to assess the gains from international diversification. Efficient sets are derived using a quadratic programming technique. We use four ex-ante portfolio strategies whose optimal portfolio weights are those of the equally weighted portfolio, the minimum-variance portfolio the certainty-equivalence tangency portfolio and the Bayes-Stein portfolio. The empirical findings, based on the performance tests of Jobson and Korkie [1981], suggest that diversification among politically risky countries improves the risk-return characteristics of optimal portfolios. However, the most striking benefit of the inclusion of politically risk countries in an international portfolio is the reduction in overall portfolio risk.© 1995 JIBS. Journal of International Business Studies (1995) 26, 301–318

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    Article provided by Palgrave Macmillan & Academy of International Business in its journal Journal of International Business Studies.

    Volume (Year): 26 (1995)
    Issue (Month): 2 (June)
    Pages: 301-318

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    Handle: RePEc:pal:jintbs:v:26:y:1995:i:2:p:301-318
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