Possibility of Applying Regional Diversification in Capital Markets of Bosnia and Herzegovina and Republic of Serbia

Abstract

Generally, risk is an uncertainty associated with future outcomes or events. In economic terms, risk is an expected deviation from the planned return of real, financial and intangible assets, of loss or cash flows associated with the uncertain event. The most famous way of reducing the overall risk is diversification of assets. Thus, diversification is a process of investment in a number of unrelated or partially related assets or activities in order to achieve stable business operation, and it shows that portfolios are poor to the extent that they should be avoided in order to increase yields and reduce risk. The portfolio diversification works because prices of different shares do not move in the entirely same direction. Statisticians generally mean the same thing when they say that share price changes are nothing less than perfectly correlated. The main objective of this paper is to discuss the impact of the global financial crisis on the movement tendency of the stock exchange index in the Western Balkans, developed countries and individual EU member states, and determine the feasibility of implementing regional diversification in order to further reduce risk and establish the portfolio of share with the lowest coefficients of correlation.