Question

Explain the mechanism through which allocation across multiple international markets provides higher levels of diversification? Further explain if the benefits of international diversification have increased or decreased over time.

Answer 1

The mechanism through which the allocation across multiple international markets provides higher level of diversification is the lower level of correlation between returns. The return of developed, developing, and various countries across different geographical boundaries are dependent on various factors nationally like inflation, currency rate, interest , gdp etc. And thus the level of correlation if investing is always less than individually investing in one nation which leads to lower unsystematic risk and thus more benefits of diversification.

The benefits if international diversification has increased over time as markets have become more advanced and the ease of investing internationally has increased because of lower transaction cost per trade and presence of various instruments like international equities, international mutual funds, private Equity funds investing globally etx

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