Long-term international diversification of equities

Equity investors exhibit home bias although they can reduce risk with diversified global portfolios. We studied 118 years of data for 21 developed markets to investigate international diversification benefits for long-horizon equity investors. Investing equal proportions in all the markets would have increased Sharpe ratios only for investors in countries with low domestic ratios. Optimal global portfolios would have significantly increased Sharpe ratios for investors in all the countries. Allocating equal proportions to five optimal countries would have provided most of the maximum potential benefits of international diversification. Investors in countries with lower domestic Sharpe ratios would have benefited more from international diversification, primarily through risk reduction.