Final answer:
Investors looking for effective international diversification should focus on constructing an optimal risky portfolio that considers the correlation between international equities. This approach surpasses simply investing a flat percentage domestically and abroad, accounting for the varying characteristics and liquidity between portfolio investment and foreign direct investment.
option c is the correct
Step-by-step explanation:
Investors seeking effective international diversification should consider the correlation structure across international equities and choose an optimal risky portfolio across stocks in different countries. This approach allows investors to minimize risk while potentially maximizing returns.
Diversification is a cornerstone in investment strategy, adhering to the proverb "Don't put all your eggs in one basket." By spreading investments across various markets and industries, the investor may mitigate the losses from any single underperforming sector or geo-political event, which can have a variety of impacts on businesses.
While investing 50% of their money in foreign stocks, either uniformly or proportional to their representation in the global market, may seem like a strategy, it may not account for the existing correlations between the equities.
Portfolio investment, often with a short-term focus, involves purchasing less than ten percent of a company and can be quickly liquidated compared to foreign direct investment (FDI). Conversely, FDI typically assumes long-term managerial responsibilities with more gradual entry and exit processes. Understanding the differences in investment liquidity and the long-term implications is crucial for investors looking for effective international portfolio diversification.