Evaluating the Benefits of Portfolio Diversification in Investment Management in Iran

There exist several companies under different industries with different risk and return in Tehran stock exchange. Investors can diversify their portfolios though different industries to minimize investment risk. In this study, we investigate the possibility of gaining from portfolio diversification though different industries in the long and the short time periods. The weekly data (price) of the largest ten industrial indices in the Tehran stock exchange are collected from 1384-1389. Applying Johansen and Juselius, (1990) cointigration tests based on the Vector Autoregressive (VAR) framework the long-run relationships among industrial indicies are investigated. We applied the Augmented Dickey- Fuller(ADF) and the Phillips and Perron (pp) non parametrice tests to test the existence of the unit roots among variables. The short – run relationships among industrial index are tested using GIRF and VDC tests. Our result confirms that the indices are cointigrated in the long-run; therefore, the possibility of gaining from portfolio diversification among industries will not be noticeable in the long time. The results of GIRF test confirm that all industries of Tehran stock exchange responses to the shocks on each of industries, these responses are moslty permanent in some cases transitory. Our results of short-run dynamics test confirm that investors can get short-run gains from diversifying their portfolios though investing in the Tehran stock exchange industries.