Reading 45: The Case for International Diversification－LO

Due to low correlations, the efficient frontier that adds foreign investments to a domestic only portfolio will have higher returns and lower risk over time.

If return is plotted on the y-axis and risk is plotted on the x-axis, the efficient frontier that includes foreign investments will plot to the left and top of the frontier that includes only domestic investments. This means that the global frontier has lower risk and greater return than the purely domestic efficient frontier.

The efficient frontier that includes foreign investments will result in higher returns and lower risk than the frontier that includes only domestic investments due to the lower correlations and higher return opportunities available in foreign markets.

Due to the low to moderate correlations between global markets, the global efficient frontier will contain portfolios with lower risk for a given return and higher return for a given risk level than portfolios on the domestic efficient frontier.