Risk-Return Dynamics of Frontier Markets: Insights from Modern Portfolio Theory

From 2015 to 2024, the frontier markets, which are thought to be the least developed part of the global market, have attracted much attention by reason of their potential benefits in diversification regarding their low correlation with developed markets. The aim of this study is to evaluate the diversification advantages of African frontier stock markets and to investigate their contribution to a global portfolio that could optimize the benefits. The Modern Portfolio Theory (MPT) in this study could be a framework for conducting correlation analysis and empirical evaluation; this could assess an altering linkage between frontier markets and conventional markets in terms of their effects on portfolio risk-return profiles. The findings suggested that African frontier markets could improve risk-adjusted returns by reducing portfolio volatility to a certain degree. It is possible to advise investors to allocate assets to frontier markets in order to enhance the construction of their global portfolios.