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J. Risk Financial Manag. 2014, 7(2), 45-66; doi:10.3390/jrfm7020045
Article

International Diversification Versus Domestic Diversification: Mean-Variance Portfolio Optimization and Stochastic Dominance Approaches

1
, 2
, 3
 and 4,*
1 Faculty of Business and Economics, University of Sfax, Sfax 3018, Tunisia 2 Department of Statistics, The Chinese University of Hong Kong, Shatin, Hong Kong 3 Institute of Higher Business Studies, University of Sfax, Sfax, 3061, Tunisia 4 Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong
* Author to whom correspondence should be addressed.
Received: 15 October 2013 / Revised: 11 March 2014 / Accepted: 24 April 2014 / Published: 8 May 2014
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Abstract

This paper applies the mean-variance portfolio optimization (PO) approach and the stochastic dominance (SD) test to examine preferences for international diversification versus domestic diversification from American investors’ viewpoints. Our PO results imply that the domestic diversification strategy dominates the international diversification strategy at a lower risk level and the reverse is true at a higher risk level. Our SD analysis shows that there is no arbitrage opportunity between international and domestic stock markets; domestically diversified portfolios with smaller risk dominate internationally diversified portfolios with larger risk and vice versa; and at the same risk level, there is no difference between the domestically and internationally diversified portfolios. Nonetheless, we cannot find any domestically diversified portfolios that stochastically dominate all internationally diversified portfolios, but we find some internationally diversified portfolios with small risk that dominate all the domestically diversified portfolios.
Keywords: international diversification; domestic diversification; mean-variance portfolio optimization; stochastic dominance international diversification; domestic diversification; mean-variance portfolio optimization; stochastic dominance
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Abid, F.; Leung, P.L.; Mroua, M.; Wong, W.K. International Diversification Versus Domestic Diversification: Mean-Variance Portfolio Optimization and Stochastic Dominance Approaches. J. Risk Financial Manag. 2014, 7, 45-66.

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