International Diversification: A Strategic Approach for Portfolio Growth

Why Diversifying Your Portfolio with International Bonds and Equities Is Essential

Prev Question Next Question

Question

Keenan Omarik, a portfolio manager in the private banking division of GSK Bank, is trying to convince a conservative client to diversify using international bonds and equities. Currently, the client holds only U.S. investments (but is well diversified) and is reluctant to change his allocation. All of the following statements support Omarik's recommendation for international diversification EXCEPT:

Answers

A. By replacing domestic investments with foreign investments in a portfolio, investors can reduce the portfolio risk while holding the number of investments constant.

B. Foreign securities usually have low correlations with U.S. investments and offer more diversification opportunities than domestic investments alone.

C. Historically, non-U.S. securities have outperformed U.S. investments on a return basis, at least in part because the non-U.S. economies have experienced higher growth rates.

D. By diversifying both domestically and internationally, investors eliminate the risk from worldwide systematic risk factors.

Show Answer

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

This statement should read, "By diversifying both domestically and internationally, investors limit risk to worldwide systematic risk factors only." (Much like domestic diversification reduces unsystematic risk from individual investments, but systematic risk still exists.) The other choices are valid arguments for international diversification.

Prev Question Next Question