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Investment Risk in Africa

Reducing Portfolio Risk through Investments in Africa

It is true: you can reduce your investment risks by allocating funds to Africa.

The reason for this is the application of the portfolio theory created by Harry M. Markowitz. The key finding of this theory is: the unsystematic risk of stock market investments can be significantly reduced by spreading funds to stocks of many different operations. This effect is the greater the less correlated the performance of single stocks are to each other. In contrast, the systematic risk that applies to all listed securities cannot be reduced by diversification.

African capital markets are less intertwined with the Western financial community then all other international stock markets.This is becauseof the low development stage of most African stock markets and due to the fact that they are still grossly neglected by global investors.

The low financial inclusion of this last “big white spot” of the investment landscape within the world financial system leads to a low correlation to stock exchanges in New York, London, Frankfurt, Beijing, Tokyo etc., resulting in a significant reduction of the total risk of a global stock portfolio.

Risk at Direct Investments

If you take a look at a single investment, things are different. The risk of a single investment in African equities is remarkably higher than that of German, European, or American stock corporations. This risk composes of the following parameters:

How will these risk factors develop in the future?