Can Canadian investors still benefit from international diversification: a recent empirical test

This thesis examines whether Canadian investors can still benefit from international diversification in the period from January 1996 to September 2006, using monthly nominal and real returns for different asset classes of Canada, US, UK, Japan, and Hong Kong. Under Markowitz’s mean-variance analysis framework, we scrutinize the benefit of international diversification in terms of the improvement of expected return and the decrease in standard deviation. Comparing the optimization results from nominal returns and real returns, we find that while the magnitude of improving expected return and reducing risk is quite limited in this period, Canadian investors can still benefit from the international diversification by hedging domestic inflation risk, since the Canadian stock market does not represent their consumption basket well. Our empirical results also indicate that international bonds, compared with international stocks, have stronger power to improve the expected return and to reduce risk level of portfolio.