INTERNATIONAL PORTFOLIO DIVERSIFICATION FOR EUROPEAN COUNTRIES: THE VIEWPOINT OF HUNGARIAN AND GERMAN INVESTORS

In this paper, we study the benefits derived from international diversification of stock portfoliosfrom Hungarian as well as German point of view. The Hungarian Stock Exchange is anemerging market in contrast to the German capital market which is one of the largest marketsin the world. In an ex post perspective the benefits from internationally diversified portfoliosfor Hungarian investors accrue only in terms of reduction in risk while for German investorsalso in terms of higher expected returns. By examining the performance of several ex antestrategies the paper also presents evidence on the benefits from international diversificationfor both countries. The strategies considered are the equally weighted (EQW), the minimumvariance (MVP), the tangency (CET) and an equally risky portfolio as the domestic one(ERP). To evaluate the performance of the strategies, portfolio adjustment costs are takeninto consideration. Because of the instability of sample mean returns, the Bayes-Stein transformationwas applied to estimate the expected returns on portfolios. A theoretical finding ofthis paper is that in the case of our ERP strategy the Bayes-Stein estimation gives the sameportfolio weights as the sample mean vector. So, no improvement in portfolio performancecould be expected by combining the Bayes-Stein estimation technique with the ERP strategy.