Risk-optimisation strategies and co-movement between the BRICS countries

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2021

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Davids, Taariq

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Abstract

This study aimed to implement various risk-optimisation portfolio strategies to determine if there are greater risk-adjusted returns than a market-capitalisation weighted portfolio from 1999 until 2019 at both the domestic level (South Africa) and international level (BRICS) using a 1-year estimation and holding period. To implement the international portfolio, all stocks listed on the BRICS countries' stock exchange are considered and will be combined to create an investable universe of stocks. However, this investible universe of stocks will first be reduced yearly to the stocks that make up the top 90% of each stock market and then combined to create a single investible universe. Resulting in two investable universes that are the BRICS markets combined and the South African market that includes the same market-capitalisation filter. Each risk-optimisation strategy will be compared to the market-capitalisation weighted portfolio. Furthermore, the study looks at the co-movement between the BRICS markets to determine if there is a change in financial integration among the BRICS indices using the DCC-GARCH and Pearson’s correlation to examine if the risk-optimisation portfolios at an international stage can produce alphas due to international diversification benefits. Based on the results from a domestic and global level when comparing the risk optimisation strategies to the market-capitalisation weighted portfolio. The market-capitalisation weighted portfolio performed poorly on a risk-adjusted basis during the full sample period and the four sub-sample periods it also performed poorly in terms of the VaR and maximum drawdown values. In contrast to this, the minimum variance portfolio and the maximum diversification portfolio was able to perform well in most of the periods and during the periods in which it performed poorly, it was at least able to maintain one of the lowest standard deviations between the portfolios which the market-capitalisation portfolio was not able to do. Based on the DCC-GARCH results and the Pearson correlation results between 2000 and 2010 the correlation between the BRICS countries increased but they have decreased slightly between 2011 and 2019. Indicating that there were still diversification benefits during this period

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A research report submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, in partial fulfilment of the requirements for the degree Master of Commerce in Finance, 2021

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