Sector Effects in Emerging Market Returns:Evidence from India

Abstract

This paper sheds light on the implications of the changing structure of stock returns for asset management. Using latest stock market data, under Engle Granger (EG) cointegration framework, it finds absence of stock return correlations among industrial sectors in India. The findings provide clear evidence of the diversification over unrelated sectors which yield more efficient portfolios than diversification over firms. Mean-variance analysis of a set of experimental portfolios further confirms the prediction on portfolio choice with multi-sector consideration. The study suggests analysis of the risk return indifference curves of the investors for matching the portfolio performance with investor utilities.