A Comparative Analysis of Sector Diversification in Australia, India and China

ASX Sector Index	Sector Index	Period	Observation
ASX 200 Consumer Discretionary Index	Consumer Discretionary	2004/4/14-2012/4/13	2087
ASX 200 Consumer Staples Index	Consumer Staples	2004/4/14-2012/4/13	2087
ASX 200 Energy Index	Energy	2004/4/14-2012/4/13	2087
ASX 200 Health Care Index	ASX 200 Health Care Index	2004/4/14-2012/4/13	2087
ASX 200 Industrials Index	Industries	2004/4/14-2012/4/13	2087
ASX 200 Information Technology Index	Information Technology	2004/4/14-2012/4/13	2087
ASX 200 Materials Index	Materials	2004/4/14-2012/4/13	2087
ASX 200 Real Estate Index	Real Estate	2004/4/14-2012/4/13	2087
ASX 200 Telecommunications Services Index	Telecommunications Services	2004/4/14-2012/4/13	2087
SSE Sector Index	Sector Index	Period	Observation
SSE Consumer Discretionary Sector Index	Consumer Discretionary	2005/1/4-2012/4/13	1898
SSE Consumer Staples Sector Index	Consumer Staples	2005/1/4-2012/4/13	1898
SSE Energy Sector Index	Energy	2005/1/4-2012/4/13	1898
SSE Financials Sector Index	Financials	2005/1/4-2012/4/13	1898
SSE Health Care Sector Index	Health Care	2005/1/4-2012/4/13	1898
SSE Industrials Sector Index	Industrials	2005/1/4-2012/4/13	1898
SSE Materials Index	Materials	2005/1/4-2012/4/13	1898
SSE Telecommunications Services Sector Index	Telecommunications Services	2005/1/4-2012/4/13	1898
SSE Utilities Sector Index	Utilities	2005/1/4-2012/4/13	1898
NSE Sector Index	Sector Index	Period	Observation
CNX Automobile Sector Index	Automobile	2004/4/14-2012/4/13	2087
CNX Banking Sector Index	Banking	2004/4/14-2012/4/13	2087
CNX Energy Sector Index	Energy	2004/4/14-2012/4/13	2087
CNX Financial Sector Index	Financial	2004/4/14-2012/4/13	2087
CNX Fast Moving Consumer Goods Sector Index	Fast Moving Consumer Goods	2004/4/14-2012/4/13	2087
CNX Information Technology Sector Index	Information Technology	2004/4/14-2012/4/13	2087
CNX Midea Sector	Midea	2004/4/14-2012/4/13	2087
CNX Metal Sector	Metal	2004/4/14-2012/4/13	2087
CNX Pharmaceuticals Sector Index	Pharmaceuticals	2004/4/14-2012/4/13	2087

Table 2:

Summary statistics of sector indices – ASX, SSE, and NSE

ASX Sector	Period	Observation	Mean	Variance	Skewness	Min.	Max.	Range
Consumer Discretionary	2004/4/14-2012/4/13	2087	-0.0062%	0.0295%	-0.0895	-14.3601%	8.8923%	23.2524%
Consumer Staples	2004/4/14-2012/4/13	2087	0.0422%	0.0267%	-1.1054	-17.8561%	9.6798%	37.5360%
Energy	2004/4/14-2012/4/13	2087	0.0615%	0.0483%	-0.8292	-19.8730%	13.0450%	32.9180%
ASX 200 Health Care Index	2004/4/14-2012/4/13	2087	0.0573%	0.0286%	-0.7165	-13.9715%	8.8720%	22.8434%
Industries	2004/4/14-2012/4/13	2087	0.0193%	0.0298%	-0.8702	-15.8409%	8.4423%	24.2832%
Information Technology	2004/4/14-2012/4/13	2087	0.0498%	0.0454%	0.4556	-15.8558%	12.6206%	28.4764%
Materials	2004/4/14-2012/4/13	2087	0.0508%	0.0554%	-0.6826	-16.1608%	11.7786%	27.9394%
Real Estate	2004/4/14-2012/4/13	2087	-0.0118%	0.0411%	-1.1577	-18.4891%	10.1560%	28.6451%
Telecommunications Services	2004/4/14-2012/4/13	2087	0.0006%	0.0298%	-0.7163	-13.2126%	8.2886%	21.5012%
SSE Sector	Period	Observation	Mean	Variance	Skewness	Min.	Max.	Range
Consumer Discretionary	2005/1/4-2012/4/13	1898	0.0653%	0.0438%	-0.6002	-10.1840%	9.2418%	19.4258%
Consumer Staples	2005/1/4-2012/4/13	1898	0.1040%	0.0375%	-0.3588	-10.0824%	8.6832%	18.7656%
Energy	2005/1/4-2012/4/13	1898	0.0733%	0.0504%	-0.1526	-9.7384%	9.2123%	18.9506%
Financials	2005/1/4-2012/4/13	1898	0.0835%	0.0461%	-0.1012	-9.4742%	9.5227%	18.9968%
Health Care	2005/1/4-2012/4/13	1898	0.0857%	0.0419%	-0.5047	-9.9085%	9.2736%	19.1821%
Industrials	2005/1/4-2012/4/13	1898	0.0453%	0.0392%	-0.4705	-9.6167%	9.5346%	19.1513%
Materials	2005/1/4-2012/4/13	1898	0.0612%	0.0480%	-0.4250	-9.5166%	8.2052%	17.7218%
Telecommunications Services	2005/1/4-2012/4/13	1898	0.0460%	0.0533%	-0.2445	-10.4016%	9.5988%	20.0004%
Utilities	2005/1/4-2012/13	1898	0.0443%	0.0358%	-0.5564	-10.2425%	8.1968%	18.4393%
NSE Sector	Period	Observation	Mean	Variance	Skewness	Min.	Max.	Range
Automobile	2004/4/14-2012/4/13	2087	0.0484%	0.0508%	-0.1788	-13.5417%	17.2685%	30.8102%
Banking	2004/4/14-2012/4/13	2087	0.0543%	0.0565%	-0.1451	-15.3694%	19.8858%	35.2553%
Energy	2004/4/14-2012/4/13	2087	0.1203%	0.0691%	-0.1176	-19.5035%	18.2817%	37.7852%
Financial	2004/4/14-2012/4/13	2087	0.0823%	0.0421%	0.1709	-9.9427%	13.4082%	23.3510%
Fast Moving Consumer Goods	2004/4/14-2012/4/13	2087	0.0603%	0.0220%	0.1068	-6.8357%	9.2418%	16.0775%
Information Technology	2004/4/14-2012/4/13	2087	0.0414%	0.0421%	-0.0185	-13.9893%	14.6993%	28.6886%
Midea	2004/4/14-2012/4/13	2087	0.0847%	0.0633%	0.2265	-11.9898%	20.0595%	32.0492%
Metal	2004/4/14-2012/4/13	2087	-0.0602%	0.0989%	0.3840	-44.3656%	44.0013%	88.3669%
Pharmaceuticals	2004/4/14-2012/4/13	2087	0.0467%	0.0209%	-0.4688	-9.1241%	12.6615%	21.7857%

Table 3:

Benchmark index

	ASX in Australia	NSE in India	SSE in China
Portfolio mean Annual return	8.35%	15.74%	19.54%
Portfolio standard deviation	16.62%	16.51%	18.70%
Sharpe ratio	0.3517	0.5296	0.7237

1 Note: Risk free rate for Australia market is 2.5 per cent, 7 per cent for Indian market and 6 per cent for China’s market.

Table 4:

ASX portfolio with different investment restrictions based on asymmetric DCC GARCH model estimated correlations.

	Consumer Discretionary	Consumer Staples	Energy	Health Care Index	Industries	Information Technology	Materials	Real Estate	Telecommunications Services	Optimal Portfolio Return	Portfolio Standard Deviation	Sharpe Ratio
Investment weights (Equally weighted)	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	8.35 %	16.57 %	0.3528
Investment weights (no short sell)	0.00 %	0.00 %	30.56 %	54.72 %	0.00 %	5.76 %	8.96 %	0.00 %	0.00 %	16.48 %	14.76 %	0.9474
Investment weights (no short sell with max 50% in one sector)	0.00 %	0.00 %	32.15 %	50.00 %	0.00 %	7.81 %	10.04 %	0.00 %	0.00 %	16.43 %	14.70 %	0.9475
Investment weights (no short sell with max 20% in one sector)	0.00 %	0.00 %	20.00 %	20.00 %	20.00 %	20.00 %	20.00 %	0.00 %	0.00 %	13.57 %	13.72 %	0.8069
Investment weights (100% short sale)	-4.98 %	-10.89 %	50.75 %	49.93 %	49.75 %	-5.65 %	28.46 %	-50.08 %	-7.29 %	43.40 %	21.66 %	1.8883
Investment weights (100% short sale with max 50% in one sector)	-4.47 %	-10.90 %	50.00 %	49.82 %	49.78 %	-5.59 %	28.42 %	-49.93 %	-7.13 %	33.38 %	18.27 %	1.8270
Investment weights (100% short sale with max 20% in one sector)	20.00 %	20.00 %	20.0 %	20.00 %	20.00 %	20.00 %	20.00 %	-60.00 %	20.00 %	23.24 %	16.46 %	1.4119

1 Note: Risk free rate equal to 2.5 per cent (overnight cash rate from Reserve Bank of Australia).

Table 5:

NSE portfolio with different investment restrictions based on asymmetric DCC GARCH model estimated correlations.

	Automobile	Banking	Energy	Financial	Fast Moving Consumer Goods	Information Technology	Midea	Metal	Pharmaceuticals	Optimal Portfolio Return	Portfolio Standard Deviation	Sharpe Ratio
Investment weights (Equally weighted)	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	15.74 %	13.60 %	0.6428
Investment weights (no short sell)	0.00 %	0.00 %	39.86 %	28.82 %	14.48 %	0.00 %	16.83 %	0.00 %	0.00 %	28.34 %	15.61 %	1.3678
Investment weights (no short sell with max 50% in one sector)	0.00 %	0.00 %	39.86 %	28.82 %	14.48 %	0.00 %	16.83 %	0.00 %	0.00 %	28.34 %	15.61 %	1.3678
Investment weights (no short sell with max 20% in one sector)	0.00 %	0.00 %	20.00 %	20.00 %	20.00 %	0.00 %	20.00 %	0.00 %	2.00 %	23.21 %	12.70 %	1.2492
Investment weights (100% short sale)	-9.15 %	-5.89 %	50.28 %	49.87 %	49.87 %	-5.80 %	28.53 %	-50.36 %	-7.33 %	49.81 %	23.11 %	1.8526
Investment weights (100% short sale with max 50% in one sector)	-9.12 %	-5.90 %	50.00 %	49.76 %	49.90 %	-5.74 %	28.49 %	-50.22 %	-7.18 %	49.69 %	23.04 %	1.8526
Investment weights (100% short sale with max 20% in one sector)	9.58 %	8.95 %	20.00 %	20.00 %	20.00 %	14.68 %	20.00 %	-33.21 %	20.00 %	32.39 %	16.00 %	1.5872

1 Note: Risk free rate equal to 7 per cent (overnight cash rate from Reserve Bank of India).

Table 6:

SSE portfolio with different investment restrictions based on asymmetric DCC GARCH model estimated correlations

	Consumer Discretionary	Consumer Staples	Energy	Financials	Health Care	Industrials	Materials	Telecommunications Service	Utilities	Optimal Portfolio Return	Portfolio Standard Deviation	Sharpe Ratio
Investment weights (Equally weighted)	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	11.11 %	19.54 %	14.69 %	0.9213
Investment weights (no short sell)	0.00 %	63.13%	0.00%	25.21 %	11.66 %	0.00 %	0.00 %	0.00 %	0.00 %	28.87 %	16.24 %	1.4080
Investment weights (no short sell with max 50% in one sector)	0.00 %	50.00 %	0.00 %	29.43 %	20.57 %	0.00 %	0.00 %	0.00 %	0.00 %	28.03 %	15.77 %	1.3968
Investment weights (no short sell with max 20% in one sector)	13.97 %	20.00 %	20.00 %	20.00 %	20.00 %	0.00 %	5.69 %	0.00 %	0.52 %	24.05 %	16.32 %	1.1776
Investment weights (100% short sale)	-7.23 %	97.01 %	14.56 %	42.33 %	28.59 %	-28.70 %	-10.53 %	-18.09 %	-17.96 %	39.69 %	21.84 %	1.5430
Investment weights (100% short sale with max 50% in one sector)	-1.87 %	50.00 %	14.78 %	41.74 %	38.12 %	-15.09 %	-4.86 %	-12.50 %	-10.33 %	32.62 %	18.11 %	1.4697
Investment weights (100% short sale with max 20% in one sector)	17.98 %	20.00 %	20.00 %	20.00 %	20.00 %	-7.55 %	8.87 %	-3.83 %	4.53 %	24.43 %	15.58 %	1.1831

1 Note: Risk free rate equal to 6 per cent (overnight cash rate from People’s Bank of China).

Table 7:

Nine sector indices equally weighted portfolio (out of sample)

	ASX in Australia	NSE in India	SSE in China
Portfolio mean Annual return	8.67%	4.94%	-2.19%
Portfolio standard deviation	9.47%	1.17%	11.69%
Sharpe ratio	0.6521	-1.7626	-.7006

1 Note: Risk free rate for Australia market is 2.5 per cent, 7 per cent for India market and 6 per cent for China market.

Table 8:

Out of sample test result

	ASX			NSE			SSE
	Optimal portfolio return	Portfolio standard deviation	Sharpe ratio	Optimal portfolio return	Portfolio standard deviation	Sharpe ratio	Optimal portfolio return	Portfolio standard deviation	Sharpe ratio
Investment weights (no short sell)	19.99%	9.32%	1.8770	16.53%	11.12%	0.8567	21.56%	13.98%	1.1134
Investment weights (no short sell & maximum 20% weights in single sector)	19.54%	9.16%	1.8602	15.03%	12.25%	0.6555	13.35%	12.99%	0.5659
Investment weights (no short sell & maximum 50% weights in single sector)	15.32%	9.66%	1.3271	13.53%	10.05%	0.6490	6.28%	11.68%	0.0243
Investment weights (maximum 100% short sell)	84.71%	26.31%	3.1249	79.67%	35.43%	2.0509	95.49%	27.61%	3.2411
Investment weights (maximum 100% short sell & maximum 20% weights in single sector)	48.57%	17.17%	2.6823	51.09%	24.24%	1.8184	54.80%	19.10%	2.5579
Investment weights (maximum 100% short sell & maximum 50% weights in single sector)	21.35%	10.40%	1.8119	20.80%	17.08%	0.8083	12.22%	12.22%	0.9052

1 Note: Risk free rate for Australia market is 2.5 per cent, 7 per cent for India market and 6 per cent for China market.

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DOI: https://doi.org/10.2478/fprj-2018-0004 | Journal eISSN: 2206-1355 | Journal ISSN: 2206-1347

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Language: English

Page range: 76 - 100

Submitted on: Aug 22, 2017

Accepted on: Dec 22, 2017

Published on: Mar 19, 2024

Published by: Financial Advice Association of Australia

In partnership with: Paradigm Publishing Services

Publication frequency: 2 issues per year

Keywords:

Sector diversification,

equity holdings

Related subjects:

Business and economics,

Political economics,

Economic theory, systems and structures,

Business management,

Business management, other,

Industries,

Banks, financial service provider, insurers

© 2024 Suneel Maheshwari, Rakesh Gupta, Jinze Li, published by Financial Advice Association of Australia
This work is licensed under the Creative Commons Attribution 4.0 License.

Volume 4 (2018): Issue 1 (December 2018)