Final answer:
International portfolio investment can reduce the volatility of an investment portfolio by diversifying across different countries and markets.
Step-by-step explanation:
International portfolio investment can reduce the volatility of an investment portfolio because national financial markets tend to move independently of each other. When an investor diversifies their investments internationally, they are spreading their risk across different countries and markets, which can help to mitigate the impact of any negative events in a single market.
For example, if an investor's entire portfolio is invested only in the stock market of their home country, they would be exposed to the risks and fluctuations of that market. However, by including investments from other countries, such as bonds or stocks from different international markets, the investor can reduce their overall portfolio volatility.
By having investments in different countries, the investor is not solely reliant on the performance of one country's economy or financial market. This can help to protect their portfolio against country-specific events such as political instability, economic downturns, or currency fluctuations.