International Diversification

Abstract

A fundamental ideal of finance is that investors should hold a diversified portfolio. This usually means a diversified portfolio that is Markowitz mean-variance (or standard deviation) efficient. In practical terms, this means the diversified portfolio should contain international investments. The first phase of this research, which is reported here, uses historic monthly rates of return for ten years from 1997 through 2006 to study four alternative investment categories. The four investment alternatives (portfolios) are (1) 30 U.S. firms with minimal international revenue, (2) 30 U.S. firms with maximum international revenue, (3) 30 closed end country funds and the 30 U.S. firms with minimum international revenue, and (4) 30 ADRs and 30 U.S. firms with minimum international revenue. The 30 firms with minimum international revenue are the benchmark and are the least efficient. The results indicate that portfolio (4), 30 ADRs and 30 U.S. firms with minimum international revenue, has the lowest risk, standard deviation, for a give level of return. The second phase, which is ongoing, follows the same general procedure as the first phase, but (1) Considers additional portfolio groups such as 30 ADRs and 30 U.S. firms with maximum international revenue. (2) Creates two categories of ADRs, those with minimum sales outside the home country and those with maximum sales outside the home country. This research reflects the idea that international diversification should be analyzed using, for instance, sales outside the home country, rather than location of a firm’s headquarters.