Portfolio diversification in a highly inflationary emerging market

This study applies modern portfolio theory to the individual asset allocation decision of an investor in an emerging market. The study utilizes data from January 1991 to January 1999. Turkey’s experience with high inflation, depreciation in its currency, and a relatively fast growing economy provide a unique financial environment to examine personal portfolio asset allocation. Seven investments are considered for inclusion in the portfolio, including the Turkish, German and American stock markets, gold, and 12-month bank deposits denominated in Turkish liras, German marks, and U.S. dollars. The findings indicate that the lira-denominated bank deposit is the dominant investment vehicle.