Sims is correct. Although the “country-specific out-performance” argument appears attractive when the investor’s home market is doing quite well, past performance is no guarantee of future results. Davis is also correct. An investor needs to diversify across borders and industries. As the world economy and stock markets have become more interconnected, simply diversifying across borders is not as effective as it once was. Increasingly stock returns are determined by the industry the firm is in. Therefore the investor should also diversify across industries. This form of diversification is termed “global” diversification, as opposed to “international” diversification that only diversifies across borders |
