International portfolio diversification: a synthesis and an update

This paper provides a synthesis of the existing literature on international portfolio diversification and presents some new results on the subject. We address the question of whether international portfolio diversification is always a reasonable method of reducing the risk of an investment portfolio without negatively affecting its return expectations. Unfortunately, there is still not a simple answer to this question. When ex-post data is examined, potential benefits of international diversification can certainly be detected. However, we also argue that it might be difficult for investors to select an optimal investment strategy ex-ante, when the correlation structure among the international equity is unstable over time. While such findings do not completely rule out the potential benefits of international diversification, they certainly make them more difficult to realize in practice.