Frontier Markets under External Factors Consideration: Over-Diversification, Risk, and Portfolio Choices (2015–2024)

Jingtian Lan

doi:10.54097/sxy2tk21

Authors

Jingtian Lan

DOI:

https://doi.org/10.54097/sxy2tk21

Keywords:

Frontier markets, Diversification, External shocks, Portfolio optimization, Investment risk

Abstract

Aiming to optimize the portfolio benefits, frontier markets are widely used for portfolio diversification strategies, but their high risk profiles and sensitivity to external shocks also brought uncertainty to the investment choices. This article examined the impact of integration in diversity on performance in frontier markets, the influence of exogenous shocks on portfolio outcomes, and the risk-adjusted priorities investors should adopt. In terms of methodologies, it is possible to use Minitab-based theoretical optimization portfolios with ex-post back-tests across two sub-periods (2015–2019; 2020–2024), using MRPUR, volatility, correlation, skewness, and drawdown diagnostics on portfolios spanning Morocco (MOR), Namibia (NAM), Kenya (KEN), and Central Africa (CEN) under the COVID-19 shock. The results illustrated that adding KEN did not reduce risk and diluted realized returns materially, while a selective MOR+NAM allocation delivered premium performance; investors should avoid over-diversification, and it is better to adopt dynamic allocation across observation countries.

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