Gains from International Diversification: 1968–85 Returns on Portfolios of Stocks and Bonds




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    • Simon Fraser Univerity and University of California, Berkeley. Financial support from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. The authors also owe thanks to Randy Hood, Yuhchang Hwang, and Jena-Marc Potier, and are greatly indebted to Frederick Shen for computational assistance. Presented at Aarhus University, Denmark, at the Conference on Research in International Finance at Centre HEC-ISA, Jouy-en-Josas, France the Western Finance Association Annual Meeting, Colorado Springs, and at Tel Aviv University The authors would like to thank the participants of these seminars, especially Avraham Beja for helpful comments.


This paper applies the multi-period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: 1) the gains from including non-U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk-averse strategies, 2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non-U.S. securities, and 3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non-U.S. asset categories.