International Business Portfolio

Diversification internationally will reduce the risk faced by a given return provided the correlation coefficient existing between the domestic and the foreign market is below one (i.e., less than 100 percent). Reduction in future correlation will lead to deeper risk reduction. Based on our results, a U.S. investor having a portfolio of U.S. stocks will face a little diversification benefit (risk reduction) by investing in Canada stocks since the cross correlation coefficients with the Canada market are rather large. On the other hand, the same U.S. investor will have improved diversification benefit through investing in the Japanese market (Yuvas). The same is true for a Canada investor. This is so because a Germany-Japan interrelation will bring about a better diversification than Germany-U.S. interconnection can. Similarly, investors in Japan will equally achieve desirable diversification of portfolio benefits if they invest in the U.S or Canada. 

I would really recommend that in accordance to two well-known theories in the finance literature, the Capital Asset Pricing Model (CAPM) and the Modern Portfolio Theory (MPT), which suggest that individual and institutional investors should hold a well-diversified portfolio to reduce risk. An institutional investor can realize a well-balanced portfolio due to the amount of funds in the portfolio is large enough for in-house diversification. Individual investors with limited affluence will have to find another way that does not require substantial funds to diversify their portfolios. Mutual funds can also offer a quick and somewhat inexpensive method to diversify for small investors and others.