Topic 4: International portfolio Diversification

Question 1

$ returns of international investment

Question 2

$ returns follow normal distribution

Answer 2

we use ‘mean-variance dominance priniciple’

Question 3

Why diversify?

Answer 3

Investors can reduce risk by spreading the funds invested across many imperfectly correlated securities

Question 4

Why diversify internationally?

Answer 4

i) higher expected return (investing into emerging stock market)
ii) lower portfolio risk: much less correlated across countries than within a country