Global Journal of Management and Business Research, A: Administration and Management, Volume 21 Issue 12

Design of Portfolio using Multivariate Analysis Dr. S. V. Ramana Rao α , Nagendra Marisetty σ & B. Lohith Kumar Abstract- Stock markets are considered a barometer of the respective country’s economy around the world. Modern portfolio theory advocates diversification for risk management, which helps maintain returns as long as indices around the world are not perfectly correlated. The relationship exists across markets; as a result, co-movement has drawn the attention of individual investors and portfolio managers for the construction of their portfolios to maximize returns for a given level of risk. The study of co-movements provides inputs for portfolio construction and facilitates the identification of markets where indices may move in the same direction or the opposite direction and the country’s stock markets that are not correlated. A review of the literature revealed that statistical tools like Correlation, Factor analysis, and Granger causality test, etc., are some of the tools that can be used to understand co-movements of markets. Alan harper et al. (2012) study used principle component analysis and inferred that Indian stock returns are aligned with its trading partners and concluded that maximizing the investors’ returns by reducing the risk. Tak Kee Hui concluded that factor analysis provides inputs for selecting foreign markets for risk diversification. This study examines the potential for diversification using 22 world stock market indices using multivariate analysis. Few indices have a strong co-movement among the sample indices, and Sensex has a weak correlation with a few indices like Tadawul (Saudi Arabia, Amman SE General (Jordan), BLOM (Lebanon), and MSM (Oman). China, Jordan, Lebanon, Qatar, and Saudi Arabia are weakly correlated with other countries except with the countries geographically associated similarly France, Germany, Belgium, US, Canada, and Mexico are highly correlated, and the rest having moderately correlated. PCA analysis results are consistent with correlation results. ρ Keywords: diversification. co-movements, factor analysis, portfolio. I. I ntroduction tock markets worldwide are the most researched topic by different people like portfolio managers, investors, researchers, policymakers and academicians, etc. One of the barometers for measuring the economy is the stock market index. Among the many techniques for risk management, diversification is the one. It can be done by mixing the variety of assets, including stocks and indices which are non –perfectly correlated into a portfolio. Harry Markowitz, a Nobel prize winner, has laid the foundation for Modern Portfolio Theory in 1952. There on investment community started Author α : Professor & Director, Siva Sivani Institute of Management, Secunderbad, Telangana, India. e-mail: ramanarao@ssim.ac.in Author σ : Faculty, Reva Business School (RBS), Reva University, Bangalore, Karnataka, India. Author ρ : Assistant Professor in Finance, Siva Sivani Institute of Management, Secunderbad, Telangana, India. focusing on portfolio risks, expected returns, and diversification and its advantages. Many researchers attempted to understand the stock markets' co- movement of various markets across the globe and selected markets over time. Presently, the topic has become the most popular topic in finance for research. In a globalized economy, the integration of financial markets provides an opportunity to investors, i.e., institutional as well as individual, to generate returns and at the same time manage risk. It gives a platform to strike a balance between risk and return. The integration of various world economies and their liberal policies has provided an opportunity for investors if they wish to diversify. The intention behind the international diversification across countries that are not perfectly correlated is to minimize the variability in the returns on portfolios. Optional risk-reward is also one of the objectives of international diversification as it offers many benefits to all investors around the world. (Mansourfar, et.al, 2010). Stock markets worldwide do not move in the same direction as the country's economic indicators, viz., industrial growth, monetary and fiscal conditions, political scenario, and taxation are unique and specific to the respective country, and returns offered by the markets also vary. Co-movements of the market’s information guide the investors on investment alternatives. A high level of co-movement of stock markets does not benefit from diversification across markets and countries, whereas Low levels of co-movement of stock prices offer investors the benefit of diversifying their holdings across the markets. Diversification strategies can be designed based on acumens of various market co- movements, which affect the risk-return relationship or the expected return from investing in a portfolio of markets. Economists and Capitalists are interested in understanding co-movements of needs. The former is interested in capital movements among countries, and the latter is keen on the effects of co-movements on equity segmentation. (Panton, Lessig, and Joy 1976). For an international investor co-movement of the world, markets are critical for developing a diversification strategy. Many countries have encouraged inflows of capital by having liberal economic policies that result in capital account surplus. Capital market reforms create suitable conditions for investors to take care of risk- return profiles. The present work emphasizes examining an opportunity to investors, both retail and institutional, for diversification by considering 22 world stock indices using multivariate analysis. Alan Harper and Zhenhu Jin S 13 Global Journal of Management and Business Research Volume XXI Issue XII Version I Year 2021 ( ) A © 2021 Global Journals