International diversification will provide low risk when the investor finds international securities having a compound rate of return equal to that of the United States and a correlation coefficient close to that of the United States portfolio.

Question

Quizplus · Accepted Answer

One of the benefits of foreign investing is that not all foreign markets move in the same direction across time, so a diversified portfolio consisting of stocks from many countries will have less volatility than a purely domestic portfolio of stocks and could even have a higher rate of return. This benefit has not always been perfect, and in the 1987 market crash, 19 of 23 markets declined more than 20%. This is unusual, given the low degree of correlation between the historical returns of different countries. An article by Richard Roll pointed out that the most significant factor relating to the size of the market decline in each country was the beta of that market to the world market index.

International Diversification Will Provide Low Risk When the Investor Finds