How to Diversify Internationally? A Comparison of Conditional and Unconditional Asset Allocation Methods

25 Pages Posted: 2 Mar 2002

See all articles by Dušan Isakov

Dušan Isakov

University of Fribourg (Switzerland) - Faculty of Management, Economics and Social Sciences

Laurent Barras

Universite du Luxembourg - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2003

Abstract

To obtain the maximum benefits from diversification, financial theory suggests that investors should invest internationally because of the larger potential for risk reduction. The question that we raise in this paper is how to select the optimal portfolio of countries? This article synthesizes the major international asset allocation methods based on mean-variance analysis that have been proposed so far in the literature. In particular it compares two types of conditional asset allocation with unconditional methods. The different policies are simulated in a truly ex-ante framework that reflects exactly the uncertainty faced by the portfolio manager at the moment he has to decide upon his future investments. The asset allocation methods are implemented from a Swiss perspective over the period 1988-2001. We find that conditional methods based on direct predictability of expected returns outperform all other asset allocation methods.

Keywords: portfolio management, international diversification, asset pricing models, conditioning information

JEL Classification: G11, G12, G15

Suggested Citation

Isakov, Dušan and Barras, Laurent, How to Diversify Internationally? A Comparison of Conditional and Unconditional Asset Allocation Methods (January 2003). EFMA 2002 London Meeting, Available at SSRN: https://ssrn.com/abstract=301540 or http://dx.doi.org/10.2139/ssrn.301540

Dušan Isakov (Contact Author)

University of Fribourg (Switzerland) - Faculty of Management, Economics and Social Sciences ( email )

Fribourg, CH 1700
Switzerland

HOME PAGE: http://www3.unifr.ch/cgf/en/

Laurent Barras

Universite du Luxembourg - Department of Finance ( email )

L-1511 Luxembourg
Luxembourg

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