Risk Reduction by International Diversification

This article describes a study of the risks, returns and correlations among international stock market averages, from the point of view of both the US and UK investor during the period 1970 to 1977. The data have been analysed in two ways. First they are treated as observations from a stochastic process, and discussed from a statistical viewpoint; then they are treated as deterministic measures of the market and are used to find optimum portfolios using a Markowitz model. The study leads to the conclusion that although it is impossible to predict which portfolio will be best in the future, an international diversification policy can reduce risk by about a half.