Estimating the Feasible Economic Gains From International Portfolio Diversification

Blake LeBaron
October 2001


International portfolio diversification is explored from the standpoint of constructing simple feasible optimal portfolios, and estimating the economic gains from moving from domestic to international equities. These experiments attempt to estimate how obvious the gains are to a simple ``rule of thumb'' sort of investor who is considering a global portfolio as an alternative to a purely domestic strategy. The results show that from the perspective of a U.S. investor the gains from diversification are quite small and unstable. They were large during the 70's, and early 80's, but the last 15 years, have made the simple justifications for international diversification much weaker.