Gains from International Diversification: 1968–85 Returns on Portfolios of Stocks and Bonds

Abstract

This paper applies the multi-period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: 1) the gains from including non-U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk-averse strategies, 2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non-U.S. securities, and 3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non-U.S. asset categories.