International Diversification:A Bootstrap Analysis

Abstract

This article uses bootstrap simulations to quantify the effects of portfolio and time diversification in the context of global investing. Using data on 15 developed country stock markets from 1975 to 2015, we show that a globally diversified portfolio has lower shortfall risk, higher Omega ratios, and higher upside potential ratios than the United States, the median market, and a narrowly diversified portfolio comprising the four largest markets. The global portfolio also exhibits superior horizon effects (better risk-adjusted performance with longer time horizons) relative to the United States and the narrowly diversified portfolio. These results suggest that long-term investors have much to gain by curbing the pervasive “home bias.”

TOPICS: Global, portfolio construction, simulations, performance measurement