Does International Diversification Pay?

Advances in computer and telecommunications technology have contributed to the emergence of more integrated global financial markets, allowing for the dissemination of information and the execution of transactions on a real-time basis around the clock and around the globe. To determine if an investor can gain additional diversification benefits by investing in today's increasingly integrated global financial markets, returns on four different indexes — Standard & Poor's Composite 500 (S&P 500); Morgan Stanley Capital International (MSCI) World Index; Europe, Australia, and Far East (EAFE) Index; and the MSCI Europe Index — are analyzed for a 22-year period, from 1978 to 2000. Although the benefits from international diversification are decreasing, an investor is better off investing a portion of his or her portfolio in international markets, especially the European markets