The benefits of diversification are well perceived by portfolio managers, that many in developed countries started investing in foreign bonds, stocks and other instruments. They found that can extend diversification principle to foreign stocks, bonds etc, to improve returns for a given risk by adopting proper techniques of diversification.
Need of International Diversification:
- The size and character of international Equity and bond markets are widely varying that it will increase the scope for larger investment and larger diversification.
- The returns in local currencies of some foreign countries are higher than in domestic markets. Thus, for example in Singapore, Malaysia, Taiwan and India the returns in local currencies are higher than in U S economy.
- The economic trends, business conditions and local profitability and earnings ratio differ widely among countries that the EPS in some developing countries is higher and give opportunity for better diversification and higher returns, through international investments.
- International investment is advantageous due to larger investment avenues now open in the first place and secondly due to the imperfect correlation among the international investment markets. The total risk of a portfolio including the international investment will be lower than with only domestic investment. The degree of volatility, and all risk measures, indicates that these risks vary among the countries and in different degrees and the possibility of covariance, or high correlation will be low.
The frontier of efficiency portfolio can be widened, by inclusion of foreign investment in a portfolio. Thus many international portfolio managers prefer to invest in India and so will be the case of India n portfolio managers, if they can diversify into international investment. There are some directions however, which will increase risk in such investment.