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A diversified international portfolio is an investment model that spreads an organisations or individuals investment between securities in various foreign markets (Levi, 2005). This investment approach means that the investor does not focus on a single local market but various foreign markets.
On the other hand, diversified local portfolio is an investment approach where the investor focuses their investments in several securities that are within the local market (Levi, 2005). There has been a general assertion that diversified international portfolio is a much better investment approach than diversified local portfolio. This paper will highlight some of the features associated with the two types of investment approaches and discern the most optimal.
There are several inherent features associated with both diversified international portfolio and diversified local portfolio. The diversified international approach accords the investor with an investment spread with respect to their exposure to risk and opportunities. According to Levi (2009), a diversified international portfolio will enable the investor to either reap from favourable market environments in many parts of the world or suffer losses from unfavourable market environments.
This implies that various political and economic aspects such as the political environment, economic performance, foreign currency performance, and absence or availability of new economic opportunities will serve to either increase or decrease the value of the investments in a diversified international portfolio depending on the direction taken by each of these aspects (Levi, 2009).
This illustrates the extent of the spread in terms of risk exposure and opportunities associated with diversified international portfolio and, therefore, diversified international portfolio can be deemed to be a high risk and high return approach to investment.
A diversified local portfolio does not result to a high exposure in terms of spreading the risk and rewards. A diversified local portfolio will expose the investor to only those risks and opportunities available in the local market. This means that only local economic factors will determine the value of the investment (Feldstein, 2007).
As much as this approach might be touted as a much safer bet as far as portfolio diversification is concerned, it significantly limits the opportunities that the investor might have to increase their investment value. A diversified international portfolio significantly increases the opportunities that an investor might increase their investments and the return on investments can be very big (Feldstein, 2007). A diversified international portfolio should be supported by sufficient market research.
References
Feldstein, M. (2007). International Capital Flows. Chicago: University of Chicago Press.
Levi, M. D. (2005). International Finance. London: Routledge.
Levi, M. D. (2009). International Finance (5th ed.). London: Routledge.
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