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International Diversification and the Home Bias Puzzle The idea behind international diversification is that by adding foreign assets to a domestic portfolio, investors reduce portfolio-level volatility and, thereby, generate better risk-adjusted returns. In any given period, portfolio returns in international markets may be higher or lower than returns generated in an investor's domestic market. However, over long holding periods international diversification seems to have delivered on the promise of reducing portfolio volatility and enhancing risk-adjusted returns. Although international diversification is thought to reduce the volatility of returns, it is not actively pursued by many investors. The first argument put forward against international diversification is that there is increasing correlations in the stock markets around the world. While correlations change over time as the markets become more integrated the correlation between markets will increase. There is empirical evidence showing that stock markets tend to move together in the long run and it seems...

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