Portfolio strategies in an international setting

Thomas Grønsberg

Student thesis: Master thesis


The objective of this thesis is to investigate the performance of some of the most established portfolio allocation models and strategies in international perspective. Our first goal was to find out the attractiveness of Denmark in a diversification perspective. Our result showed the Danish market has good diversification opportunities yielding a mean correlation 0.48 towards all countries. In contrast does the diversification potential seem to decrease when Denmark is in economic downturn. Moreover, our results showed that the Jordanian market had the lowest correlation against the Denmark both in general and in an economic down turn. Consequently this means that a Jordanian investor may find Denmark interesting for investment purposes, since an eventual down turn in a Denmark may be counter balanced with an upturn in Jordan. This supports the general opinion that markets located at a longer distance and the unlike market development had better diversification effect. Next, we looked to the portfolio opportunities for a Danish investor to choose from when he wants to invest internationally, we see that the tangent portfolio seems to perform best of the portfolio models while a moving average trigger strategy does have the best overall performance. Furthermore, we also have found no support that the models that aimed to minimize risk do have a lower risk than other models. Moreover, as we introduce a real life application namely transaction costs this did not change the rankings of the top portfolio models nor strategies. Again the trigger strategy is the definite winner with a Sharpe ratio of 34.47%, Jensen’s Alfa at 1.18% per month and information ratio at 0.50. Because of its low tradability it is also the strategy with the lowest changes in performance. In overall matters this is clearly superior to the tangent portfolio as well. However, we see a clear tendency that strategies with a higher trading rate have a higher decrease in the performance measures Sharpe ratio, Jensen Alfa and the Information ratio. The last event of this thesis shows how tangent and the trigger strategy perform compared to professional funds in the real world. The conclusion is surprising, showing that the trigger strategy clearly outperforms all funds throughout the period of 2005-2009.Seeing the other funds there is only one that beats the tangent portfolio, namely Carnegie fund. Again this is quite surprising given the resources the fund managers and the simplicity of Markowitz tangent portfolio.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2010
Number of pages87