Diversification Strategies in African Frontier Markets: An Empirical Back-Testing Approach

In accordance with the result of the back-test in different diversified portfolios in the African frontier market, African frontier markets provide both potential benefits and challenges, which was reasoned by their different degrees of disintegration and volatility from the global capital market. This study seeks to assess the diversification advantages objectively of African frontier markets using a back-testing methodology. The study employed portfolio optimization strategies to evaluate risk-adjusted returns and inter-market correlations, and it is possible to utilize daily log-returns from ten frontier markets spanning 2015 to 2024. The results indicated that diversity in African frontier markets offers substantial risk mitigation; nevertheless, excessive diversification might impact profits negatively. Aiming to optimize the investment benefits, the decision of investment had a demand to concentrate on balancing the integration degrees in portfolios.