Vol. 8 No. 5 (2020): BUSINESS & MANAGEMENT STUDIES: AN INTERNATIONAL JOURNAL
Articles

RISK MANAGEMENT BY PORTFOLIO OPTIMIZATION IN INTERNATIONAL STOCK MARKETS

Gülçin ÇÖMEZ
Lect., Bandırma Onyedi Eylül University
Çağatay Başarır, Doç. Dr.
Assoc. Prof. Dr., Bandırma Onyedi Eylül University

Published 2020-12-25

Keywords

  • Portföy Optimizasyonu,
  • Ortalama Varyans Modeli,
  • Risk ve Getiri,
  • Uluslararası Çeşitlendirme,
  • Portfolio Optimization Mean-Variance Model Risk and Return International Diversification

How to Cite

ÇÖMEZ, G., & BAŞARIR, Çağatay. (2020). RISK MANAGEMENT BY PORTFOLIO OPTIMIZATION IN INTERNATIONAL STOCK MARKETS. Business & Management Studies: An International Journal, 8(5), 4157-4174. https://doi.org/10.15295/bmij.v8i5.1641

Abstract

  1. INTRODUCTION

 

Risk minimization journey for investors has two objectives. The first one is return maximization, and the second one is decreasing portfolio risk. The most common solution for risk minimization is portfolio diversification. Investors may divide their savings into different investment assets by diversification. By diversification, investors can invest different financial assets from different sectors, countries and types. However, investors only aim to optimize their risks.

Markowitz defines optimum portfolios which have minimum risk and maximum return. Additionally, diversification for portfolio optimization is the key point.  It is stated that portfolios diversified by low correlated financial instruments may lead to reduce portfolio risk and increase portfolio return.

Markowitz's mean-variance portfolio optimization method has contributed to modern investment theory literature, and this approach has been practised for several times to obtain optimum diversified portfolios. Optimum portfolios lead to risk optimization and return maximization.

This study aims to reduce risk rates for portfolios. In orde to obtain optimum portfolios which have minimum risk rates and maximum return rates, this study uses international portfolio diversification.  International stock markets have been specified which have high international trade relations with Turkey in 2018 in order to get optimum portfolios.

  1. METHOD

Mean-variance model is applied through this study as the mean-variance model is the most common model for international portfolios. Although the model ignores the investors' attitudes, since it constraints short sellings by limiting the sum of equity weights to one, the model turns into a useful model for portfolio optimization.

By using the international stock market equities for mean-variance model, optimum portfolios are obtained. Returns, risks and Sharpe rates for optimum portfolios are compared during the study.

  1. CONCLUSION AND DISCUSSION

As the study only investigates optimum portfolios for risk-averse investors, minimum risky portfolios are selected. On the other hand, for return maximization, Sharpe ratios are compared, and portfolios with maximum Sharpe ratios are selected. The study showed that the mean-variance model could have feasible solutions for international portfolio optimization.

Selected optimum portfolio with minimum risk offers a 3% risk rate and 0,74% return rate, which means if an investor stands to 3% risk rate, he/she can increase savings by 0,74%. If an investor focuses on maximizing return rate, the selected portfolio of the study offers a 6% risk rate and 2,1% return rate. Whereas, the investor can increase savings by 2,1% by standing to 6% rate. The study again proves that willing to have more return is only possible with more risky portfolios.

For further studies, different models for international portfolio selections can be implemented, and investor behaviour/attitude can be included. This study uses only stock market equities for portfolio optimization. Therefore, EMTIA data or other financial assets can be attached to the model and more diversified portfolios can be obtained.

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