Investments, tenth edition

Rank Country 

Rank  Country

Rank Legend

  1  Greece 

 27 Morocco 

  2  Ireland 

 28 Poland 

  3  Finland 

 29 Hungary 

  4  U.S. 

 30 Philippines 

  5  Italy 

 31 Mexico 

  6  Japan 

 32 Argentina 

  7  Belgium 

 33 Korea 

  8  Portugal 

 34 Norway 

  9  France 

 35 China

10 U.K. 

 

36 Chile

11 Netherlands 

 

37 Russia

12 Taiwan 

 

38 India

13 Israel 

 

39 South 

Africa

14 Germany 

 

40 Turkey

15 Jordan 

 

41 Sri 

Lanka

16 Switzerland 

 

42 Pakistan

17  Hong Kong  

 43 Thailand

18 Spain 

 

44 Czech 

Republic

19 Austria 

 

45 Brazil

20 Sweden 

 

46 Egypt

21 New 

Zealand   

47 Peru

22 Denmark 

 

48 Indonesia

23 Canada 

 

49 Colombia

24 Singapore

25 Malaysia

26 Australia

50

  Benefits from International Diversification 

  Table  25.10  tells the story of international diversification. First, notice the strong trend 

of increasing correlation. Of the 16 countries, only four show stable correlation from the 

late 1960s through 2011. The rest show significant increases. In the most recent decade, 

the correlation of the portfolio of tradeable world country portfolios excluding the U.S. 

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P A R T   V I I

  Applied Portfolio Management

with that of the U.S. is .90 (see also the nearby box). Hence, the benefits of diversification 

can be expected to emanate from countries with relatively lower correlations (admittedly, 

among themselves, as well as with the U.S.).  Table 25.9 B shows that such low correlations 

are found mostly in the emerging markets.  

 To assess the value of international diversification, we return to  Table 25.9 A, where 

we first viewed portfolio standard deviation. We find that whether we diversify from 

U.S.-only investments either to the entire world or to emerging markets only, the stan-

dard deviation of the portfolio increases. This results from higher standard deviations 

of foreign markets that are not offset by the relatively low correlations of emerging 

markets. 

 Nevertheless, the objective of diversification is  not  merely risk reduction. Rather, it 

is to increase the Sharpe ratio. Here we see that, in any configuration, the Sharpe ratio 

of internationally diversified portfolios is higher than that of the U.S. alone. Even with-

out any notion about emerging versus developed markets, holding the world portfolio 

results in a significantly higher Sharpe ratio. Using the more revealing  M

2

  measure (see 

Chapter 24), the advantage of the world countries portfolio amounts to 284 basis points 

annually. Even the less diversified world ETF portfolio earned an annual risk-adjusted 

premium of 107 basis points. 

 Thus the data clearly indicate that despite increasing correlations, even a passive 

strategy of holding a world ETF is still superior to the U.S.-only portfolio.  Figure 25.11  

shows diversification benefits based on 1995 correlations and diversification into ran-

domly selected stocks from around the world compared with a one-stock portfolio. 

This  representation no longer serves the purpose of analyzing the current benefits from