Munich Personal RePEc Archive

Portfolio diversification strategy for Malaysia: International and sectoral perspectives

Hakim, Idwan and Masih, Mansur (2014): Portfolio diversification strategy for Malaysia: International and sectoral perspectives.

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Abstract

The focus of this paper is to investigate the potential for portfolio diversification strategies based on investing across international markets or economic sectors, using Malaysia as a case study. Analysing the comovement and correlation between returns and volatilities of the different markets or assets, therefore, is the key to gauge the potential benefits from diversification. Two important features of the comovement are their dynamic fluctuations across time period and time horizon or scales. Thus, the paper applies recent techniques of multivariate volatility modelling and wavelet transform, which can analyse time series over both the time and frequency domain. Our findings suggest that there are potential for gains from portfolio diversification strategies into both international markets, as well as sectors of the domestic stock market. There are international stock markets and domestic sectors which have low correlations and comovement with the Kuala Lumpur Composite Index. The low correlation makes it ideal to diversify the portfolio and reduce the overall investment risks. However, the findings also noted that the correlations vary across time and scales. Hence, fund managers need to be aware of the dynamics which may change at any particular point in time, which may affect the portfolio risks.

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