How Much International Exposure is Advantageous in a Domestic Portfolio?

Abstract

The answer to how much international exposure is advantageous in a domestic portfolio depends on what the investor assumes about the long-run risk and expected return of the foreign assets and currency exposure, and on the investor's risk/return penalty. The analysis here begins with the investor holding a core position in foreign assets to minimize the risk of the portfolio. Using estimates of volatility and correlation from market history, the authors suggest that a long-run allocation of 29% to 30% in foreign equity to deviate from this core allocation depending on the expected relative returns of domestic and foreign equity and on the expected relative returns of domestic and foreign equity and on the expected currency return.