An examination of diversification benefits under different market conditions / Rohit Kishore

Kishore, Rohit (2012) An examination of diversification benefits under different market conditions / Rohit Kishore. Terengganu International Finance and Economics Journal (TIFEJ), 2 (2). pp. 118-125. ISSN 2232-0539

Abstract

This study examines risk diversification benefits achievable to the Australian mixed-asset portfolio of stocks and bonds from inclusion of listed property trusts (LPTs) as the third asset class in the portfolio. There is available considerable literature showing evidence of added risk diversification benefit from inclusion of property assets within the mixed-asset investment portfolio. This study extends knowledge in this area by examining whether the level of diversification benefit varies under different market conditions, that is, in a rising, static and falling market conditions. The three assets forming the portfolio: listed company shares, bonds and listed property trusts are represented by Australian share market index, bond index and listed property trust index respectively. Methods used for the analysis include rolling and recursive correlation and modern portfolio theory (MPT). Following MPT theory, several efficient frontiers are constructed to measure the different levels of diversification benefits under the three different market conditions. The study finds strong evidence to suggest that correlation of LPTs with stocks and bonds increase during the falling market conditions. Increasing correlation suggests that diversification strategies including LPTs should be reviewed under different market conditions. In particular during the falling market condition, the market volatility is highest and diversification of risk most required. However, the results of increasing correlation during this condition in fact suggest reduction in the diversification benefits. One of the important implications of this finding therefore is that investment strategies should carefully analyse the strategic levels of allocations to LPTs, in order to maximise diversification benefits when it is most needed during the falling market condition.

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Item Type: Article
Creators:
Creators
Email / ID Num.
Kishore, Rohit
kishore_r@usp.ac.fj
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > Investment, capital formation, speculation
H Social Sciences > HG Finance > Investment, capital formation, speculation > Stock exchanges. Insider trading in securities
H Social Sciences > HG Finance > Investment, capital formation, speculation > Stock price indexes. Stock quotations
H Social Sciences > HG Finance > Investment, capital formation, speculation > Securities. Fixed-income securities > Bonds
H Social Sciences > HG Finance > Investment, capital formation, speculation > Government securities. Industrial securities. Venture capital
Divisions: Universiti Teknologi MARA, Terengganu > Dungun Campus > Faculty of Business and Management
Journal or Publication Title: Terengganu International Finance and Economics Journal (TIFEJ)
UiTM Journal Collections: Others > Terengganu International Finance and Economics Journal (TIFEJ)
ISSN: 2232-0539
Volume: 2
Number: 2
Page Range: pp. 118-125
Keywords: Stocks, Bonds, Listed Property Trust, Correlation, Volatility, Systematic, Unsystematic Risk
Date: 2012
URI: https://ir.uitm.edu.my/id/eprint/59631
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