The Benefits of Global Diversification

International diversification reduces total risk to a portfolio by adding uncorrelated assets and brings higher long-term returns. In this study, the research looks to see if any single country index or continent index consistently outperforms a diversified value-weighted global market index. In order to value-weight the global index, the study uses the International Monetary Fund’s voting shares of each country and equates each voting share to each country or continent’s stake within the value-weighted global market index. To correct for currency exchange, the study uses iShares and other ETFs denoted in the United States Dollar. The value-weighted global market index is based off of compound interest off of one dollar invested in a specific year in which the investment started. With all of these in place, the study creates a fund of funds representing the world economy. The conclusion of this study is that because of the Efficient Market Hypothesis, no one country or continent consistently outperforms the value-weighted global market index based on the risk premium of each country or continent in relation to the value-weighted global market index and subsequent regression analysis