International Diversification with Large- and Small-Cap Stocks

• Main Authors: Eun, Cheol S., HUANG, Wei, LAI, Sandy
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2518; https://doi.org/10.1017/S0022109000003604
• Institution: Singapore Management University

To the extent that investors diversify internationally, large-cap stocks receive the dominant share of fund allocation. Increasingly, however, returns to large-cap stocks or stock market indices tend to co-move, mitigating the benefits from international diversification. In contrast, stocks of locally oriented, small companies do not exhibit the same tendency. In this paper, we assess the potential of small-cap stocks as a vehicle for international portfolio diversification during the period 1980-1999. We show that the extra gains from the augmented diversification with small-cap funds are statistically significant for both in-sample and out-of-sample periods and remain robust to the consideration of market frictions.