The Impacts of Asian Currency Crisis on International Portfolio Diversification

ABSTRACT

This paper is to investigate the benefits of including bonds and stocks markets in the optimal portfolio using the classical model. Three types of investments: stocks alone, bonds alone, and a mix of stocks and bonds are considered. Efficient frontier is constructed for each type of investment. This study is also to include international diversification choices before and after the recent Asian currency crisis. It has been shown that the risk of investment can be reduced by diversification across countries. For both before and after Asian currency crisis, our results show that investing in the bond markets alone will provide substantial return and optimal risk reduction for investors who are risk averse. However, the combination of stocks and bonds will provide a better mix giving a highest return per unit risk. After the Asian currency crisis, the bond markets selected are shifted from North America markets to Oceania markets and France market. This analysis provides a comprehensive study for Singaporean investors but the research can be repeated from a different perspective such as Japan and US point of view.