12. The following excerpt is from Warren Bailey and Rene M. Stulz: Recent international diversification literature uses
Question:
12. The following excerpt is from Warren Bailey and Rene M. Stulz:
Recent international diversification literature uses monthly data from foreign stock markets to make the point that American investors should hold foreign stocks to reduce the variance of a portfolio of domestic stocks without reducing its expected return.22
a. Why would you expect that the justification of diversifying into foreign stock markets would depend on empirical evidence regarding the ability to
“reduce the variance of a portfolio of domestic stocks without reducing its expected return”?
b. Typically in research papers that seek to demonstrate the benefits of international diversification through investing in a foreign stock market, two efficient frontiers are compared. One is an efficient frontier constructed using only domestic stocks, the other is an efficient frontier constructed using both domestic and foreign stocks. If benefits can be realized by diversifying into foreign stocks, should the efficient frontier constructed using both domestic and foreign stocks lie above or below the efficient frontier constructed using only domestic stocks? Explain your answer.
Step by Step Answer:
Foundations Of Global Financial Markets And Institutions
ISBN: 9780262039543
5th Edition
Authors: Frank J. Fabozzi, Frank J. Jones, Francesco A. Fabozzi, Steven V. Mann