Global Diversification

Posted: 29 Apr 2005

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Jonathan Scheid

Assante Asset Management Inc.

Multiple version iconThere are 2 versions of this paper

Abstract

Correlations between the returns of US stocks and international stocks were higher recently than in the past, reaching 0.86 during the 60 months ending in December 2003. Today's investors note the high correlations between US and international stocks and doubt the benefits of global diversification. We argue that the benefits of global diversification remain high and that the correlation between US and international stocks is a misleading measure of the benefits of global diversification. This is for two reasons. First, the benefits of global diversification depend not only on the correlation between the returns of US and international stocks but also on the standard deviations of these returns. Second, we tend to have poor intuition about the link between correlation and the benefits of diversification. A 0.86 correlation seems high enough to eliminate the benefits of diversification, but even correlations much higher than 0.86 are associated with substantial benefits. Dispersion of returns is a better measure of the benefits of diversification because it accounts for the effects of both correlation and standard deviation and because it provides an intuitive measure of the benefits of diversification. We present the relationship between correlation, standard deviation, and dispersion.

Keywords: Diversification, global diversification

JEL Classification: G00

Suggested Citation

Statman, Meir and Scheid, Jonathan, Global Diversification. Journal of Investment Management, Vol. 3, No. 2, Second Quarter 2005. Available at SSRN: https://ssrn.com/abstract=712212

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

Jonathan Scheid

Assante Asset Management Inc. ( email )

1190 Saratoga Avenue, Suite 200
San Jose, CA 95129
United States

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