<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>Diversification of financial securities is considered a substantial element of portfolio risk. In this context, the construction of an optimal portfolio is an ongoing concern for portfolio managers. This study measures the risk–reward tradeoffs linked to the stock indexes of Germany, Spain, Italy, France, and England. First, the stock indexes are analyzed as individual portfolios and later compared to the hypothetical common equity index. The results show diversification benefits gained from a hypothetical common European stock market. Individual stock prices and trade volumes are collected weekly from January 1, 2008 to December 31, 2018. The results indicate that, on average, the most well-diversified equity indexes are IBEX35, FTSE MIB, and FTSE100. In contrast, DAX, MDAX, and CAC40 on average tend to be less diversified. The diversification risk for DAX, MDAX, and CAC40 decreases from joining a common hypothetical stock market, while for FTSE100, FTSE MIB, and IBEX it increases.</p>
</abstract>

Diversification of financial securities is considered a substantial element of portfolio risk. In this context, the construction of an optimal portfolio is an ongoing concern for portfolio managers. This study measures the risk–reward tradeoffs linked to the stock indexes of Germany, Spain, Italy, France, and England. First, the stock indexes are analyzed as individual portfolios and later compared to the hypothetical common equity index. The results show diversification benefits gained from a hypothetical common European stock market. Individual stock prices and trade volumes are collected weekly from January 1, 2008 to December 31, 2018. The results indicate that, on average, the most well-diversified equity indexes are IBEX35, FTSE MIB, and FTSE100. In contrast, DAX, MDAX, and CAC40 on average tend to be less diversified. The diversification risk for DAX, MDAX, and CAC40 decreases from joining a common hypothetical stock market, while for FTSE100, FTSE MIB, and IBEX it increases.

Assessing the diversification risk of a single equity market: evidence from the largest European stock indexes

Faculty of Management, Business, and Economics

International Journal of Management and Economics

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Diversification of financial securities is considered a substantial element of portfolio risk. In this context, the construction of an optimal portfolio is an...

Assessing the diversification risk of a single equity market: evidence from the largest European stock indexes

Article Category: Empirical Paper

Published Online: Mar 31, 2022

Page range: 3 - 16

Received: Sep 17, 2020

Accepted: Mar 16, 2022

DOI: https://doi.org/10.2478/ijme-2022-0001

Keywords
diversification benefits, financial crisis, risk perspective, single equity market, stock index

© 2022 Artor Nuhiu et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Assessing the diversification risk of a single equity market: evidence from the largest European stock indexes

Article Category: Empirical Paper

Published Online: Mar 31, 2022

Page range: 3 - 16

Received: Sep 17, 2020

Accepted: Mar 16, 2022

DOI: https://doi.org/10.2478/ijme-2022-0001

Keywordsdiversification benefits, financial crisis, risk perspective, single equity market, stock index

© 2022 Artor Nuhiu et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
diversification benefits, financial crisis, risk perspective, single equity market, stock index