Chapter 25 – International Diversification
CHAPTER TWENTY-FIVE
INTERNATIONAL DIVERSIFICATION
CHAPTER OVERVIEW
This chapter notes that domestic (U.S.A) securities comprise less than half of the entire assets available
for investment purposes. The benefits of increased diversification as a result of international investing are
presented. International indexes are available for passive investing purposes.
LEARNING OBJECTIVES
After studying this chapter, the student should understand the advantages of international diversification,
PRESENTATION OF MATERIAL
25.1 Global Market for Equities
This section presents initial background for the chapter. The growth of international investment has been
25.2. Risks Factors in International Investing
The major elements of foreign exchange risk are presented. It is not possible to completely hedge for
foreign exchange risk since the returns that an investor gets in foreign markets are not completely
25.3 International Investing: Risk, Return, and Benefits from Diversification
The evidence shows that there are positive benefits to international diversification. It is possible to
Chapter 25 – International Diversification
Table 25.10 displays returns for developed and emerging markets for 2002 through 2011. The tables
display correlations in both U.S. Dollars and local currencies for the various markets.
25.4 Assessing the Potential of International Diversification
Some of the contribution to diversification results from short-selling. Markets have become more closely
25.5 International Investing and Performance Attribution
Benchmark returns on international investing are measured by a variety of indexes. One widely used
index is the European, Australian, and Far East (EAFE) Index. It is important to be aware of the
Excel Model
A sample efficient diversification model is available at the Online Learning Center