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<title>Study Session 8 | Reading 22 | The Case for International Diversification</title>
<meta name="description" content="Chartered Financial Analyst Level 3 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<h1>Reading 22</h1>
<h3>The Case for International Diversification</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">AlchemistsAcademy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
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<h2>The Traditional Case for International Diversification</h2>
<ul>
<li>Risk reduction through low correlations</li>
<li>Superior portfolio return performance</li>
<li>Currency risk not a barrier</li>
</ul>
<aside class="notes">
Low correlations between various assets can reduce portfolio volatility. Additionally, many international assets offer superior risk-adjusted returns as measured by the Sharpe ratio. Finally, currency risk shoudn't be viewed as a barrier to investment because (1) market and currency risks are not additive and are weakly/negatively correlated; (2) exchange rate risk of an investment can be hedged; (3) the contribution of currency risk should be measured for the total portfolio rather than individual securities, as part of that risk is diversified away; and (4) the contribution of currency risk decreases with the length of the investment horizon
</aside>
</section>
<section>
<h2>The Case Against International Diversification</h2>
<ul>
<li>Correlations have increased over time</li>
<li>Correlations increase in volatile markets (contagion)</li>
<li>Barriers to investing:</li>
<ul>
<li>Less familiarity with foreign markets</li>
<li>Higher political risk in less developed regions</li>
<li>Questionable market efficiency (e.g. low liquidity, lack of timely and reliable information, possible price manipulation and insider trading)</li>
<li>Regulations on amount of allowable foreign investment</li>
<li>Higher transaction costs</li>
<li>Dealing with complicated tax implications</li>
<li>Currency risk</li>
</ul>
</ul>
<aside class="notes">
Correlations between international asset classes have increased over time, decreasing their diversification benefits. This has occured due to (1) less segmentation between markets and a trend toward global integration; (2) increased capital mobility; (3) the opening of many economies to free trade; and (4) an increasingly global and interconnected economic environment
</aside>
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<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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