Benefits of International Diversification

The present paper aims to analyse the benefits, which may be provided by the international diversification. Due to the processes of globalization and financial integration, investors are able to include foreign assets into their portfolios in order to diversify the risks. This can be achieved due to reason of assets being not positively correlated with each other and subject to shock of economies with various structures. The paper sees the improvement in the Sharpe ratio as the benefit from investing internationally. The factors, which may contribute to the change in the dependent variable, are the growth of GDP per capita, market capitalization of local companies, trade and domestic credit as fractions of GDP, the country risk, the exchange rate volatility and some global risk. All these constituents are discussed in details, together with a regression analysis provided. Also, the dummies of 48 countries are estimated to learn the benefits of investing to each particular country.