An empirical evaluation of estimation error reduction strategies applied to international diversification

This paper evaluates the international diversification performance of estimation error reduction strategies from the perspective of individual investors in 34 countries. These strategies can provide significantly lower levels of volatility versus the naively diversified domestic and international equity benchmarks. Both the global market capitalization weighted portfolio and the optimization strategies fail to achieve significant return-to-risk gains beyond the domestic market portfolio for investors in at least 31 countries. The results suggest that the potential economic gains available from international diversification reported in previous literature may be overstating the time-varying benefits that can be realized out of sample.