The benefits of international diversification with weight constraints: A cross-country examination

This paper measures the effect of allocation weight constraints on the potential benefits from international diversification for investors with long investment horizons in 34 countries. Naive international diversification does not provide positive benefits for all investors during the 1993-2014 investment period. Relaxing the market allocation weight constraints applied to in-sample mean-variance optimized portfolios increases the potential for diversification gains. The return-to-risk benefits that these portfolios provide versus the domestic market portfolio are not statistically significant for many investors. There is also an imbalance between the global demand for equity in markets that provide portfolio efficiencies versus the supply of available equity, which is an additional constraint that may limit the efficiency gains that can be captured in equilibrium.