The Markowitz approach to portfolio optimisation and its application in determining the optimal internationally diversified portfolio for a South African investor in unit trusts

Smit, Barend (2000-12)

Thesis (MBA)--Stellenbosch University, 2000.

Thesis

ENGLISH ABSTRACT: The purpose of this report is to determine how much international diversification a South African investor should practice in order to minimise his portfolio risk and to maximise his portfolio return. The most recent budget allows the South African investor to invest up to R500 000 in overseas investments. The analysis was performed over the period December 1993 to May 2000 for an investor investing in Investec Guinness Flight unit trusts. Unit trusts were used instead of general indices, because it is a well-known investment vehicle for the layman and is already a well-diversified representation of a specific focus sector. The Markowitz Portfolio Selection Theory was used to perform the analysis and to determine the optimal internationally diversified portfolios composed of the following markets: South Africa, the United States of America, Europe, the United Kingdom, and Japan. It was found that International Diversification does hold great potential benefits for the South African investor investing from an emerging market. It was also found that the South African Equity market carries the highest risk compared against the other markets investigated, however the South African Bond and Money Market showed good risk return features compared to other markets. Optimal portfolios were generated for the 'conservative' or most risk-averse investor, the 'balanced' investor, and the 'aggressive' investor or the risk-loving investor. The portfolio combinations looked like this respectively: 4% USA Equity, 5% EU Equity, 3% SA Bond, and 88% Money Market for the conservative investor; 33% USA Equity, 25% EU Equity, 18% SA Bond, and 24% SA Money Market for the balanced investor; 51% USA Equity, 48% EU Equity and 1% SA Bond for the aggressive investor.

AFRIKAANSE OPSOMMING: Die doel van hierdie verslag is om vas te stel hoeveel internasionale diversifikasie 'n Suid-Afrikaanse investeerder moet aangaan ten einde die risiko's rondom sy portefeulje enersyds te minimaliseer en andersyds maksimum opbrengste te lewer. Die analise is oor die tydperk Desember 1993 tot Mei 2000 uitgevoer vir 'n investeerder wat in Investec Guinness Flight effektetrust sou investeer. Instede van algemene aandeleindekse, is van effektetrusts gebruik gemaak omdat dit 'n welbekende investeringsvoertuig onder Jan Publiek is en reeds 'n goedgediversifiseerde verteenwoordiging van 'n spesifieke fokussektor is. Daar is van die Markowitz Portefeulje Seleksie Teorie gebruik gemaak vir die analise en dáárdeur is ook vasgestel wat die optimaal-internationaal gediversifiseerde portefeulje uit die volgende market sou wees: Suid-Afrika, Die Verenigde State van Amerika, Europa, Brittanje en Japan. Daar is gevind dat, Internationale Diversifikasie potentiëel-goeie opbrengste vir die Suid-Afrikaanse investeerder in 'n opkomende mark lewer. Daar is ook gevind dat die Suid-Afrikaanse Algemene Ekwiteitmark die hoogste risiko dra vergeleke met ander markte tydens die ondersoek periode, alhoewel die Suid-Afrikaanse Kapitaalmark en Geldmark goeie lae risiko opbrengste oplewer teenoor ander markte. Optimale portefeuljes is gegenereer vir die konserwatiewe of mees risiko-gekante investeerder, die gebalanseerde investeerder en die aggressiewe investeerder. Die portefeuljekombinasies is onderskeidelik as volg:. 4% VSA Ekwiteit, 5% Europese Unie Ekwiteit, 3% SA Kapitaalmark, en 88% SA Geldmark vir die konserwatiewe investeerder; 33% VSA Ekwiteit, 25% Europese Unie Ekwiteit, 18% SA Kapitaalmark, en 24% SA Geldmark vir die gebalanseerde investeerder; 51% VSA Ekwiteit, 48% Europese Unie Ekwiteit en 1% SA Kapitaalmark vir die aggressiewe investeerder.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/51993
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