The Benefit of International Equity Diversification: The ‘1/N’ Diversification Rule

Abstract

This paper studies the international portfolio diversification benefits across time in equity investing using the ‘1/N’ diversification rule. Equity returns from 70 countries are used, including developed, emerging and frontier markets, during the period from 1976–2009. We highlight that the ‘1/N’ diversification rule enables international portfolio benefits across 9 sub periods except the 3 sub periods (31/7/1980-31/12/1984), (29/1/1988-31/12/1992) and (31/1/1995-29/1/1999). Therefore, we study the benefit of international equity investment in five investment universes across two partitions (30/01/1976-31/12/2009) and (29/01/1988-31/12/2009). We found that international diversification in emerging markets is beneficial only when selective approach is undertaken. Notably, international diversification benefit is highest when emerging markets are combined with developed markets.