UNHEDGED AND HEDGED EFFICIENT GLOBAL PORTFOLIO DIVERSIFICATION
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The objective ofthis paper is to reexamine the widespread recommendation that a por(folio ofrelativelyfew global stocks provides efficient diversification. This prescription which is quoted in textbooks and popular press is generatedfrom the pioneering research ofSolnik on the diversification effects ofglobal investing. This articlefirst reexamines the logical basis.for this widespread prescription, and then, by analyzing stock returns in Japan, UK and USA, this article reaches the conclusion that the minimum number of stocks in an efficiently diversified global portfolio should be dramatically Larger than is commonly prescribed - possibly as high as JOO stocks, depending upon how close to average risk the individual investor desires to be.
Abstract
The objective ofthis paper is to reexamine the widespread recommendation that a por(folio ofrelativelyfew global stocks provides efficient diversification. This prescription which is quoted in textbooks and popular press is generatedfrom the pioneering research ofSolnik on the diversification effects ofglobal investing. This articlefirst reexamines the logical basis.for this widespread prescription, and then, by analyzing stock returns in Japan, UK and USA, this article reaches the conclusion that the minimum number of stocks in an efficiently diversified global portfolio should be dramatically Larger than is commonly prescribed - possibly as high as JOO stocks, depending upon how close to average risk the individual investor desires to be.