A PORTFOLIO APPROACH TO A CROSS-SECTORAL AND CROSS-NATIONAL INVESTMENT STRATEGY IN TRANSITION ECONOMIES

This paper takes a systematic look at the portfolio choice problem fac ed by Investment Banks or Funds investing in transition economies. We relate the performance of projects in the transition economies to the broader macroeconomic and international environments, which affect the project through their input-output structures and financial balance s heets. Among the macroeconomic determinants of enterprise behaviour ar e productivity growth, real wage growth, movements in the internationa l terms of trade, shocks to the relative price of traded and non-trade d goods, domestic and foreign interest rates, currency depreciation an d the rate of inflation. We evaluate the attractiveness of alternative investment strategies and provisioning rules from the perspective of portfolio theory.