Exploring the Diversification Benefits of Frontier Markets in Global Portfolios

Carl Philip Fiane & Thomas Alexander Juell

Student thesis: Master thesis


Frontier markets represent a fast-growing segment of international equity markets. Attractive fundamentals, diversification benefits and undervaluation characterize the segment. Despite these opportunities, investors generally avoid frontier markets due to their perceived riskiness. This thesis aims to research frontier equity markets and their applicability in an international portfolio for an American investor. More specifically, the thesis intents to investigate the risk-reducing and performance-enhancing properties of frontier markets.

The authors construct nine optimal portfolios subject to different allocation restrictions to evaluate the individual portfolios' performance. The portfolios are constructed using Markowitz’s mean-variance, Estrada’s mean-semivariance, and a Black-Litterman-inspired method. Portfolios are then optimized with respect to Sharpe- and Sortino-ratio and evaluated on the basis of return, risk and performance metrics. Two different sample periods are introduced to test the portfolios for consistency. The portfolios were evaluated and compared to each other as well as a benchmark portfolio.

The study finds that frontier equity markets can serve as a viable diversification tool for American investors aiming for higher risk-adjusted returns. The portfolios consistently yield similar outcomes, and frontier market-inclusive portfolios achieves the highest performance metrics. However, the findings suggest that the risk-reducing abilities of frontier markets are inconsistent. Compared to the benchmark portfolio, the performance is, however, varied. The authors conclude that frontier markets possess performance-enhancing properties in an international portfolio.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2023
Number of pages117