Why is international diversification important for portfolio construction?
— International diversification is crucial for sensible portfolio construction as it allows investors to increase expected returns without increasing risk or decrease risk without reducing expected returns.
Can international diversification decrease risk without reducing expected returns?
— Yes, diversifying a portfolio across imperfectly correlated assets, such as international stocks, allows investors to decrease risk without reducing expected returns.
Why is adjusting for valuation changes important in estimating expected returns?
— Adjusting for valuation changes is crucial in estimating expected returns because historical data cannot predict the best performing markets, and valuation changes play a significant role in determining future returns.
Have U.S equity returns exceeded their expected returns?
— Yes, U.S equity returns have exceeded their own expected returns by about two percent per year, which can be attributed to luck and learning, but it is uncertain if this trend will continue in the future.
Does international diversification protect against poor long-term returns in specific countries?
— Yes, international diversification protects investors against holding concentrated positions in countries with poor long-term returns, despite short-term disappointments due to market crashes.
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