A Principal Components Analysis of the Portfolio Diversification Benefits of Investing in Emerging Stock Markets

Emerging stock markets are attractive portfolio diversification opportunities for
global investors because of their low correlation with each other and with developed stock
markets. However, there are few studies that investigate which emerging markets are the
best portfolio diversification prospects for U.S. investors. In this paper, we study this issue
with a sample of 25 national emerging stock market indexes and the U.S. Standard and
Poor's 500 Index. By using the Principal Components Analysis (PCA) technique, we
identify the emerging stock markets that are the most attractive portfolio diversification
opportunities for U.S. investors.