International Diversification of Investment Portfolios

U.S. and Japanese Perspectives

Abstract

The gains from international diversification of investment portfolios from the Japanese as well as the U.S. perspectives are analysed. The major findings are detailed. First, the potential gains from international, as opposed to purely domestic, diversification are much greater for U.S. investors than for Japanese investors. For U.S. investors, the gains accrue not so much in terms of lower risk as in terms of higher return, and the opposite holds for Japanese investors. Second, using various ex ante international investment strategies de- signed to control parameter uncertainty, U.S. investors can realize substantial gains from international diversification in out-of-sample periods. Japanese investors, however, can gain relatively little. Third hedging exchange risk generally allows U.S., but not Japanese, investors to benefit more from international diversification. Management Science, January 1994,40(l): 140-161. (Reprinted with permission of ABI/Inform, Copyright UMI.)