Global Risk Diversification: An Empirical Investigation From The U. S. Perspective

Abstract

The case for global risk diversification has been built on correlations between the U.S. and international stock markets. Now that we witness how tightly the world stock markets are correlated, especially after the global financial crisis of 2008-2009, does it still make sense to diversify globally? Can the investments in global equity portfolios be protected in today’s volatile markets? These questions have preoccupied a growing number of portfolio managers in recent years, as well as many of us who invest in stock markets. Since gold/silver and bonds tend to move inversely with the stock markets, a hedging strategy of combining them with stock portfolios should protect the equity investments during global market downturns. The study explores the risk-return profiles of various global portfolios and provides insights about the extent to which the U.S. investors need to allocate their investments in Asia/Pacific, European stock markets, and across other investment vehicles, such as gold/silver and bonds. The findings from this research have practical implications for both investors and portfolio managers interested in going global.