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Luke is a U.S.-based equity investor who decides to diversify internationally by holding 10% of his...

  1. Luke is a U.S.-based equity investor who decides to diversify internationally by holding 10% of his portfolio in foreign stocks. Would this strategy be more effective at reducing overall portfolio risk before or after the year 2000? Why?

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Answer #1

After the year 2000, the global market became developed. US market was the the only big market during the period around 2000. Before 2000, diversifying risk in foreign stock would not be recommended because those markets are closed economies and hence are very risky in terms of return as well as protection of investor.

However, post 2000, when the foreign market developed, it would be wise to diversify through investing in foreign equity. Example: During the 2008 crisis, Indian and Chinese market were less impacted, hence money there was safe and less risky.

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