Abstract In the past few years, diversification has turned into a highly controversial issue amongst numerous managers in almost each and every business. It is contended by many that diversification is vitally important and highly effective especially when it comes to evaluating the financial performance. There are several studies about the relationship between diversification and financial per...

Can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of ‘‘home bias’’ displayed by investor portfolios? We find that the answer is no, so long as individuals have access to free international trade in financial assets. In particular, it is never optimal to exhibit home bias with respect to domestic traded-good equities. By contrast, holdings...

This paper investigates the impact of constraints of short-sale and over-weight to international diversification benefits. We find that the short-sale restriction alone does not influence the diversifying benefit while the addition of over-weighting constraint significantly worsens mean-variance of optimal portfolio. This finding holds for the analyses of regional and cross-regional portfolios....

We draw on portfolio theory and international diversification in order to analyse strategies allowing to reduce emerging economies’ exposure to exchange-rate risk. We show in particular that it may be efficient for an investor, in terms of maximising the return-to-risk ratio, to build up a portfolio of emerging-country assets denominated in local currency unhedged against currency risk compared...

We present a model where the enforcement of international risk sharing contracts is costly. With non diversifiable enforcement costs, welfare is not necessarily maximized for perfect worldwide risk sharing. Some groupings, or “pools” of countries can deliver higher welfare, with higher diversification gains net of enforcement costs. We construct an exhaustive list of such pools of countries. Fo...

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iii Evidence for the benefits of international over domestic portfolio diversification is still mixed. In part, this may be due to different methodologies employed. There has recently been a resurgence of interest in Markowitz allocation methods in preference to alternatives such as index models. Accordingly, this paper examines international portfolio optimisation using the full Markowitz meth...

The paper provides a general equilibrium model to show how the incompleteness of international financial markets leads to insufficient industrial specialization and a depressed volume of goods trade. As international portfolio diversification is limited and productivity is uncertain, investors wish to maintain a diversified industrial structure, not specializing according to their comparative a...