What Has Happened To International Diversification? Returns, Risks, And Correlations

Abstract

Factors other than correlation must be considered in order to understand the reduced diversification effects of EAFE stocks in U. S. portfolio. The diminished importance of EAFE stocks as diversifying securities can be traced first to higher risk in comparison to the S&P 500 and corporate bonds. A comparison of returns to EAFE in the 1990s versus U. S. securities further demonstrates the lack of competitiveness of EAFE stocks for funds in optimized portfolios. Nevertheless, long-term average returns, risks, and correlations provide evidence in support of international diversification of U. S. portfolios.