Gains from International Diversification: 1968-85 Returns on Portfolios of Stocks and Bonds

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Abstract
This paper applies the multi‐period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: 1) the gains from including non‐U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk‐averse strategies, 2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non‐U.S. securities, and 3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non‐U.S. asset categories.

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