I.  Introduction
           Due to globalization, portfolio managers are increasingly evaluating investment opportunities on an international basis for the purpose of increasing returns and decreasing portfolio risk through diversification.  As globalization increases, it is expected that the correlations of returns on stock indexes between transition economies of former Soviet Block countries with developed countries will be lower.  This expectation is based on the size of their economies and on a more limited interaction in the globalization process.

II.  Data            The data for this paper will be obtained from the Thomson Financial Worldscope database for selected former Soviet Block Countries such as Poland, the Czech Republic, Hungary, Ukraine, and Slovakia and for selected developed countries such as Germany, UK, France, U.S., and Japan.  Returns, standard deviations of returns, and pair-wise correlations will be examined.  Portfolios of varying compositions will be constructed to determine the diversification potential available from including investments in stock indexes from transition economies in portfolios of stock indexes from developed economies.            Dependent upon the availability of data for longer time periods, comparisons will also be made using time-series risk-return information to examine changes in market efficiency associated with the evolution of the transition economies toward the state of development of developed economies.  Market efficiency in this analysis will be measured by comparing excess returns in a Capital Asset Pricing Model context between subsets of the overall period of the analysis.  The usefulness of investments in the stock indexes of the transition economies for developed countries’ portfolios will also be examined for subsets of the overall time period used in the analysis.   III.  Expected Results
           It is expected that correlations of returns of stock indexes of selected transition economies between the returns of stock indexes of selected developed countries will be lower than correlations of the returns of stock indexes between various pairs of selected developed countries.  This expected result would indicate that investments in market indexes of transition economies may be useful for diversification purposes.  When comparisons of correlations are made for subsets of the overall time period, it is expected that the correlations between the returns of stock indexes of selected transition economies and the returns of stock indexes of selected developed countries will increase as more recent time period subsets are used in the analysis.  It is also expected that the efficiency of the transition stock market indexes will improve with time as measured by excess returns within the Capital Asset Pricing Model framework. IV.  Implications of the Findings
           The implications of the results of this study will be to indicate the usefulness of investments in stock market indexes of transition countries by developed countries.  If it is shown that improvements in the return and risk of portfolios of developed countries are available from investments in stock market indexes of transition countries, more capital will flow to the transition economies, thereby lowering their cost of capital which should facilitate capital inflows into these economies.