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International Mutual Funds Stability and Benefits of Diversification

Author

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  • Essayyad, Musa

    (Department of Finance & Economics, King Fahd University of Petroleum & Minerals)

  • Haddad, Mahmoud

    (Department of Accounting, Economics, Finance, and International Business, University of Tennessee at Martin)

  • Benkato, Omar

    (Department of Finance and Insurance Ball State University)

Abstract

It is generally recognized that international portfolio diversification may generate substantial reduction in systematic risk. Previous studies assume stability of the systematic risk measure, beta, and hence assume the permanence of risk reduction generated from international diversification. In this paper, we employ four econometric techniques to investigate the intcr-temporal stability of benefits of systematic risk reduction realized through international diversification. Our findings indicator that market risk is not stable over time. The practical implication is that, contrary to the conclusions of many previous studies, the benefits of international diversification through systematic risk reduction are not ad infinitum attainable, given the dramatic variation in domestic and international market conditions. The theoretical implication is that instability of market risk would distort the construction of efficient frontier and the selection of international optimal portfolio.

Suggested Citation

  • Essayyad, Musa & Haddad, Mahmoud & Benkato, Omar, 1994. "International Mutual Funds Stability and Benefits of Diversification," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 47(2-3), pages 139-159.
    • Handle: RePEc:ris:ecoint:0415
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