chapter  6
32 Pages

Normalized Value

ByRoss Paul Bruner

This chapter investigates the challenges of finding the best portfolio mix between emerging-country. The hope is that the process will yield results that fulfill the promise of diversification: to improve the risk/return experience of a portfolio by holding multiple assets, compared with that which is possible by holding either asset alone. The standard expression of modern portfolio construction is the Markowitz mean-variance model. As the term implies, the model has two elements: a measure of expected returns referred to as the 'mean' because it represents the average return, and a measure of risk referred to as 'variance', the statistical calculation of risk. It is crucial to consider the characteristics of emerging-country data when analyzing portfolio diversification needs. The market experiences in the emerging countries do not lend themselves to traditional portfolio optimization methods. The suggestion, nonetheless, to somehow forecast the future, apparently without regard to the past, is an attempt to force an inappropriate method onto the data.