Question

(Chapter 19) 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?

Answer 1

This strategy of investment into international business is effective as it helps in diversification of risk throughout the different countries in the global economy.

this is strategy which would have been more effective before the tech bubble burst of 2000, when there was a whole lot of concentration into the technology stocks and the bubble burst .

So this strategy would have been more effective before the year 2000 as there was high concentration in United States technology stocks and they were trading at skyrocketing values whitch were not sustainable so a rational Investor who wants to diversify, would have looked for some international businesses which where available cheap and which are not that richly valued, so that it would have helped him to allocate it better and mitigate the risk of concentration of Investments into a particular economy.