Abstract

Portfolio selection, as proposed by Markowitz, suggests that investors' needs are best satisfied by selecting an efficient portfolio that minimizes risk and maximizes returns. In search of these efficient portfolios, international investors are now looking more towards emerging markets due to the high level of financial integration among the world's developed capital markets. Regional cooperation by bodies such as NAFTA, EU and ASEAN, have lead to an increase in the interdependency of the capital markets in these areas. The regional body in the Caribbean, CARICOM, has also undertaken many of the same policies as NAFTA, EU and ASEAN to aid in the development of the Caribbean. In this paper, we investigate the emerging capital markets of the Caribbean as a potential investment region to aid international investors in attaining an optimal portfolio allocation and to see if regional investors can still adequately diversify their portfolios through local markets. The results show that international investors can effectively diversify their portfolio by allocating capital to all three markets in the Caribbean. Furthermore, there is no evidence of cointegration among the markets of the Caricom region implying that the liberalization measures undertaken in the region have yet to take effect.