International Diversification for Swedish investors : A comparative study of different national and international scale portfolios.

University essay from Umeå universitet/Företagsekonomi; Umeå universitet/Företagsekonomi

Abstract: This thesis aims to investigate the benefits of international diversification from a Swedish perspective. It presents a comparative study of the performance of different portfolios based on their degree of international diversification with a focus on Swedish investors frame of reference. Such a study is motivated by the contradictory literature about portfolio diversification and information portfolio theory that advocate for a more concentrated portfolio. It focuses solely on comparing portfolios constituted with major indices of a representative sample including countries from different parts of the world. The different scales of those portfolios start from a divided part of the Swedish economy to end with a global portfolio. We observed that international diversification can outperform the domestic portfolios when considering risk and return. In addition, we observed that the best performing portfolios over the periods are systematically concentrated on emerging countries and that the high return of those emerging countries is often not associated with a correspondingly high standard deviation as it should be expected. The best levers of performance that we identified as a result of this comparative study are, first, the strategy consisting in focusing on the most concentrated portfolios in order to maximize the return and then trying to time the market, thanks to a specialized information collection strategy, but this bear a high undiversifiable risk. Or second, adopting an intentionally diversified portfolio and collecting information about the most promising emerging markets that will be then over weighted in the portfolio to lower the risk and higher the return. Lastly, the study recommend that home-biased investors should change their behavior and consider international investments when building a portfolio.

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