Why not diversify internationally rather than domestically ?


Financial Analysts Journal

janvier-février 1995, vol. 51, n°1, pp.89-94

Départements : Finance

The article focuses on the various aspects of portfolio diversification in foreign securities as well as in domestic common stocks. As diversification increases, the risk of a portfolio decreases in all countries but not proportionally. Very quickly, the marginal reduction in variability of adding an extra security in the portfolio becomes smaller. An American investor, holding 20 securities reduces tile total risk by only another three per cent if he added another 50 different securities to his portfolio. Even with a very large number of stocks the portfolio risk can never be reduced below a certain level. But, through an international diversification of a portfolio, greater reduction of risk can be attained. The gains from international diversification are substantial. In terms of variability of return, an internationally well-diversified portfolio would be one-tenth as risky as a typical security and half as risky as a well-diversified portfolio of American stocks. The benefits of international diversification for a German or Swiss investor would be even larger relative to a highly diversified domestic portfolio