UNHEDGED AND HEDGED EFFICIENT GLOBAL PORTFOLIO DIVERSIFICATION

The objective of this paper is to reexamine the widespread recommendation that a portfolio of relatively few global stocks provides efficient diversification. This prescription which is quoted in textbooks and popular press is generated from the pioneering research of Solnik on the diversification effects of global investing. This article first reexamines the logical basis for this widespread prescription, and then, by analyzing stock returns in Japan, UK and USA, this article reaches the conclusion that the minimum number of stocks in an efficiently diversified global portfolio should be dramatically Larger than is commonly prescribed - possibly as high as 100 stocks, depending upon how close to average risk the individual investor desires to be.