Relationship between portfolio diversification and value at risk: Empirical evidence

This research explores the risk associated with the stocks prices in the seventeen selected companies that are listed in Indian BSE (100) National as well as portfolios of investment that are constructed from these seventeen companies employed. Additionally, for considering the possibility of international diversification, construction of portfolios of investment form stock price indexes in various emerging markets and developed countries of the world is considered. Correlations for domestically as well as internationally diversified portfolios are computed to unveil the relationship between stock prices of various firms as well as domestic and internationally diversified portfolios of investments. Further, to understand the effect of diversification on the risk associated with each of the portfolios of investments employed, value at risk analysis (VaR) is undertaken for studying the benefits associated with domestic as well as international diversification (if any).The study results show that domestic diversification lowers the expected losses associated with each of the domestic portfolios of investment employed where the international diversification substantially mitigates the portfolio risks. Results from VaR analysis reveal that diversification lowers the portfolio risks and additional reduction in portfolio risks is realized by international diversification.