Diminishing gains from international diversification
DOI:
https://doi.org/10.61190/fsr.v13i3.4795Keywords:
Diminishing gains, International diversificationAbstract
Academics and practitioners have long maintained that internationally diversified portfolios are more efficient - offer better risk-return performance - than a purely domestic portfolio. We examine the effectiveness of international diversification in the presence of periodic rebalancing and associated transaction costs. We find that the benefits of international diversification are much smaller than previously understood. Our findings suggest that only a small allocation (10%) of a domestic equities portfolio to international securities may be justified. Even the slight advantage of the international diversification may disappear when taxes are incorporated in portfolio evaluation.
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