An empirical examination of the benefits of international diversification

We examine the benefits of international portfolio diversification for U.K. investors between January 1985 and December 2000 using the approach of Wang [Wang, Z., 1998. Efficiency loss and constraints on portfolio holdings. Journal of Financial Economics 48, 359-375] and Li et al. [Li, K., Sarkar, A., Wang, Z., 2003. Diversification benefits of emerging markets subject to portfolio constraints. Journal of Empirical Finance 10, 57-80]. We find significant increases in the Sharpe [Sharpe, W.F., 1966. Mutual fund performance. Journal of Business 39, 119-138] and certainty equivalent return (CER) performance in moving from a domestic strategy to an international strategy that includes either global industry or country equity portfolios, even in the presence of short selling restrictions. We also find significant diversification benefits using U.K. unit trusts with international equity objectives. However, U.K. international unit trusts do not capture all the diversification benefits provided by either global industry or country equity portfolios.