Portfolio Optimization and Diversification in China: Policy Implications for Vietnam and Other Emerging Markets

ABSTRACT

This article is conducted to examine risk, return, and portfolio optimization at the industry level in China over the period 2007–2016. On the ground of the classical Markowitz framework for portfolio optimization, the mean-semivariance optimization framework is established for China’s stock market at the industry level. Findings from this study indicate that healthcare sector plays a significant role among 10 industries in China on a stand-alone basis. In addition, a significant change of rankings among the sectors in term of risk is found when the mean-semivariance optimization framework is used. We also find that utilizing this new framework helps improve the optimal portfolios in relation to performance, measured by Sortino ratio, and diversification. A simulation technique, generally known as resampling method, is also utilized to check the robustness of the estimates. While the use of this resampling method appears not to improve the performance of optimal portfolios compared with the mean-semivariance framework for China, there is a remarkable advance in diversification of the optimal portfolios. Implications for investors and the governments in Vietnam and other emerging markets have emerged from the study.

KEY WORDS:

• China
• mean-semivariance
• portfolio optimization
• resample

Acknowledgement

The author wishes to acknowledge financial assistance from Ho Chi Minh City Open University (E2019.03.2).

Notes

1. We would like to particularly thank a reviewer who draws an attention to us that the Sortino ratio is not consistent with the stochastic dominance (SD) result. It is well known that there are some relations between SD and VaR and CVaR (Ma and Wong 2010), some relations between SD and Omega ratio (Guo, Jiang, and Wong 2017), Kappa ratios (Niu, Wong, and Xu 2017), Farinelli and Tibiletti ratio (Guo, Niu, and Wong 2019). As a result, other empirical studies may need to consider all these above techniques to ensure that the findings are enhanced and robust. All these references are listed in the reference list of the article.

2. It is noted that China conducted its extensive economic reforms in the 1970s which led to a dramatic reduction in public expenditures and undermined the public health and health-care systems of the country. However, in 2009, the government started recognizing and reversed course again and established several social health insurance schemes. It is reported that China has now expanded social health insurance to the vast majority of its 1.4 billion citizens, but public spending remains low in comparison with the total demand from its people for the services. As a result, the reliance on private financing generates inequalities in access to healthcare which is getting more popular in China in these days.

Additional information

Funding

This work was supported by the Ho Chi Minh City Open University, Vietnam [E 2019.03.2].