The Benefits of International Portfolio Diversification
9 Pages Posted: 14 May 2010
Date Written: May 12, 2010
Diversification is one of the main pillars of finance theory. However, its benefits for a conservative investor have been put in check recently with the financial crisis whether it really adds value to the investment profile. The objective of this study is to evaluate if the inclusion of new asset classes add value to a traditional conservative portfolio of USD and EUR bonds. To reach this goal we take into account several asset classes from equities to commodities and generate what would be the efficient frontier under both the Markowitz and the resampling approaches. We also evaluate the effect of the chosen numeraire in the analysis. Our results indicate that the benefits of diversification are higher for less risk averse investors and the choice of the numeraire has a dramatic effect in the portfolio optimization problem and so this is one of the main decisions the investor should care about.
Keywords: Diversification, Numeraire, Resampling, Risk Aversion
JEL Classification: G11, G15
Suggested Citation: Suggested Citation