Abstract
In this study, we examine the construction of ex ante internationally diversified stock portfolios under both parameter uncertainty and exchange rate uncertainty. Both passive and active strategies are explored for handling exchange rate uncertainty. One passive strategy is to always use forward contracts to hedge exchange rate risk. A second is to use protective puts to hedge the exposure. Three conditional hedging strategies based on the random walk model are also explored. The random walk strategy exhibited superior performance in comparison with the unhedged and passive hedging strategies under all parameter estimation techniques. These results imply that the random walk model provides a good estimate of next period's spot rate of exchange.
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