Academic journal article Asian Social Science

The Benefits of Diversification in Asean Stock Market to Malaysia Investors

Academic journal article Asian Social Science

The Benefits of Diversification in Asean Stock Market to Malaysia Investors

Article excerpt

Abstract

The establishment of ASEAN Exchange had removed the barriers and hassles from investors in six ASEAN member countries to invest freely and easily within the six countries' stock market, including Malaysia. This study aimed to analyse whether the establishment of ASEAN Exchange, can provide diversification benefit to Malaysian investors compared with their domestically diversified portfolio. The analysis is done based on 25 companies which selected from each participating ASEAN country by using Efficient Frontier Model. In addition, Sharpe Ratio had also been developed and analysed to provide an insight to Malaysia and ASEAN investors regarding the attractiveness of each ASEAN market. The results of this study conclusively show that an ASEAN level of diversification does bring benefits to Malaysian investors, as ASEAN portfolio outperforms all individual country's portfolio.

Keywords: ASEAN Exchange, diversification, efficient frontier index, Sharpe ratio

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Investors today actively and purposefully diversify their investments to different area in order rise the return by lessen the risk of their investment at the same time. The effect of diversification using portfolio to increase return and reduce investment risk had been proven by researchers. The diversification value of a portfolio is said to be positive in 3 circumstances:

1) A portfolio had a higher return and lower risk than the other one.

2) A portfolio is able to achieve higher return at same level of risk.

3) A portfolio is able to achieve same level of return at lower level of risk.

So, how can investors obtain positive diversification value? Harry Markowitz's portfolio theory had provided the answer, Markowitz stated that positive diversification value exist in any assets that are imperfectly correlated, the lower the correlation between the assets, the higher the diversification value.

Therefore, due to the lower correlation between different countries' economy, internationally diversified portfolio generally had more diversification value than a domestically diversified portfolio in terms of both risk and return. However, recent years studies had shown that the value of international diversification is reducing, as the worldwide financial market is becoming more assimilated due to the improvement of telecommunication and transportation technologies and the removal of trade barrier (Fadhlaoiu, Bellalah, & Lahiani, 2011).

Despite the common belief on the reduction of diversification value in international diversification, ASEAN Exchange, a collaboration that consists of 7 exchanges from 6 different countries in South East Asia, including Malaysia's Bursa Malaysia, Vietnam's Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE), Singapore's Singapore Exchange (SGX), Indonesia's Indonesia Stock Exchange (IDX), Thailand's The Stock Exchange of Thailand (SET) and Philippine's Philippine Stock Exchange (PSE), is trying to create an integrated stock exchange in 2015 that will allows investors from all member's countries to purchase stocks listed in other members' countries in their home countries seamlessly at a lower cost (ASEAN Exchange, 2013). As at 15th October 2012, the ASEAN Trading Link established by the ASEAN Exchange had linked Bursa Malaysia, Singapore Exchange and The Stock Exchange of Thailand, offering more than 2,200 listed companies to the investors in Thailand, Singapore and Malaysia (ASEAN Exchange, 2013). Although the research by Agati (2007) shows that financial markets in European Union (EU), a similar but more integrated collaboration like ASEAN, are highly correlated to each other, hence the diversification value is low, similar research had not been perform for ASEAN financial market in recent years. Hence, the objectives of this paper are stated below:

4) To assess the diversification value that Malaysian investors could gain through ASEAN diversification by utilizing the ease of ASEAN Trading Link. …

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