The described GDP weighting strategy has investors look at a foreign country's share in global GDP and then allocate that same number to the respective market. Currently, the 27 countries in the MSCI EM Index make up for 39% of global GDP.
The third and final asset allocation strategy factors in an investor's appetite for risk and allocates to various assets in a way that maximizes expected returns based on that risk profile. It typically leads to a diverse portfolio, such that a shortfall in one part can be made up by gains in another.
To test the approach which is also known as Mean Variance or Modern Portfolio Theory, Morgan Stanley took historical data dating back to 1988, and modeled a portfolio with 100% of its holdings in developing market equities. And after examining MSCI World and MSCI EM Indexes' monthly returns and volatility, they found that the optimal allocation to emerging markets equities is
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