This paper investigates the impact of European Union membership on Baltic investors' ability to diversify. The research addresses the impact of E.U. membership on effectiveness of country-based diversificatin versus industry-based diversification strategies for Latvian investors. I compared correlation matrices of country index returns before and after the Baltic entry date of May 1,2004. Then, I created similar correlation matrices for the Baltic industries. In the pre-unification period, Latvian equity returns were inversely correlated with other European and U.S. indices after translating into the Latvian currency. However, after joining EU, cross-country correlations increased dramatically. As a result, Latvian investors have lost substantical ability to diversity internationally. Post-unification industry correlation results are inconclusive due to small sample sizes, indicating lack of ability to achieve diversification across industries. I also tested if the portfolio variance of nineteen equally weighted Baltic securities had increased or decreased after European unification. This test resulted in a lower portfolio risk indicating that as European markets become more integrated, risk decreases.
Vricella, Christina, "The Impact of EU Membership on Baltic Investors' Portfolio Management" (2005). Honors College Theses. 22.