International Portfolio Diversification Paper
University of Phoenix
FIN/403
International Portfolio Diversification Paper
Globalization is a result of foreign trade and investment worldwide. Individual investor’s mainly invest in a foreign portfolio investment (or foreign indirect investment) which is “the investment by individuals, firms, or public bodies (e.g., governments or nonprofit organizations) in foreign financial instruments such as government bonds, corporate bonds, mutual funds, and foreign stocks” (Shenkar & Luo, 2004, p. 53). Portfolio investments must be diversified to minimize risk and should be a combination of local and foreign investment techniques, scenarios, and equities. The purpose of this action is to minimize loss of finances and to be diversified across the board. Rarely is it that all sectors within a given market do not perform to provide an investor some type of gain when diversified in local and foreign equities. Therefore, diversification is advantageous and beneficial to the individual and group investors. The rest of this paper will explain some of the pros and benefits of international portfolio diversification and discuss three different global funds that have used the concept of international portfolio diversification for success.
The Benefits of International Diversification
There are several benefits to international investing; one of them is having the opportunity to invest in more diverse portfolio versus what is offered in a local market portfolio. The biggest advantage is that with international portfolio diversification the investors often reaps a better risk to return than by investing solely in U.S. or local securities (Shapiro, 2005, p. 411). In other words, “The broader the diversification, the more stable the returns and the more diffuse the risks” (Shapiro, 2005, p. 411).
The second advantage of international diversification is the fact investment in different international markets can...