Recent finance literature has documented that benefits gained from diversifying a portfolio into developed markets has decreased over time. A lower correlation between emerging markets and developed markets as compared with the correlation among developed markets has motivated investors to look for a new opportunity, investing in emerging markets.
This study examines whether Australian investors could have gained benefits by diversifying their portfolios into the six Asian emerging markets (Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand) during the period of over ten years from 01/1988 to 06/2000. Six international portfolios consisting of the equal weights of the Australian index with each of the six emerging markets and one portfolio consisting of the equal weight of the Australian index and all six emerging markets indices are formed and compared with the performance of the 100% Australian index portfolio. The Sharpe ratio is used to measure the performance of the portfolios.
In contrast to the existing literature which suggested that there exist potential benefits from diversifying into emerging markets, our results show that Australian investors could not gain benefits by investing in the Asian markets, especially during the time of the economic crises which significantly affected all the markets in this region.