Explaining the Risk/Return Mismatch of the MSCI China Index: A Systematic Risk Analysis

摘要

This study examines a risk/return mismatch of the MSCI China Index, which has offered investors low returns and high volatility, yet remains a favorite within the global investors' portfolio. The paper suggests several insights, both from behavioral and traditional finance perspectives, to explain this mismatch. An international risk decomposition model is applied to separate the total risk of China's index return into global systematic risks, regional systematic risks and country specific risks. It suggests the index's lower than average systematic risk might be one of the explanations for its risk/return mismatch. The study also finds that the China Index's systematic risks, both global and regional, have been increasing, but more so at the global level.