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Article

Diversifying and Rebalancing Emerging Market Countries

David M Stein, Vassilii Nemtchinov and Sam Pittman
The Journal of Wealth Management Spring 2009, 11 (4) 79-88; DOI: https://doi.org/10.3905/jwm.2009.11.4.079
David M Stein
is chief investment officer at Parametric Portfolio Associates in Seattle, WA.
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  • For correspondence: dstein@paraport.com
Vassilii Nemtchinov
is manager of applied research at Parametric Portfolio Associates in Seattle, WA.
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  • For correspondence: vnemtchinov@paraport.com
Sam Pittman
is quantitative research manager at Parametric Portfolio Associates in Seattle, WA.
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  • For correspondence: spittman@paraport.com
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Abstract

This article discusses the diversification and rebalancing of emerging market countries. Emerging country risks are high and relatively uncorrelated, and the cap-weighted index is concentrated. In the absence of prior information on returns, these characteristics lead one to expect that a structured rebalanced portfolio will outperform a capweighted one over the long term. The authors study this phenomenon with a theoretical model of portfolio returns—quantifying performance advantages and leading to a better understanding what drives them. It turns out that even though emerging markets suffer high transaction costs and unreliable information, pragmatic portfolio implementations with relatively little trading are still possible. For a real implementation, the authors review how the key drivers of excess performance have evolved during the recent increase in globalization.

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The Journal of Wealth Management
Vol. 11, Issue 4
Spring 2009
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Diversifying and Rebalancing Emerging Market Countries
David M Stein, Vassilii Nemtchinov, Sam Pittman
The Journal of Wealth Management Jan 2009, 11 (4) 79-88; DOI: 10.3905/jwm.2009.11.4.079

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Diversifying and Rebalancing Emerging Market Countries
David M Stein, Vassilii Nemtchinov, Sam Pittman
The Journal of Wealth Management Jan 2009, 11 (4) 79-88; DOI: 10.3905/jwm.2009.11.4.079
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  • Article
    • Abstract
    • SOME CHARACTERISTICS OF EM WEIGHTS AND RETURNS
    • THE MATHEMATICS OF LONG-TERM GROWTH AND A SIMPLE THEORETICAL MODEL
    • TARGET WEIGHTS, REBALANCING, AND PRAGMATICS
    • EVOLVING EM VOLATILITIES AND CORRELATIONS OVER TIME
    • CONCLUSIONS
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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