In this paper I explore the role of portfolio diversification in explaining the distribution of foreign investment across countries. I capture the portfolio diversification motive by a measure of country-specific riskiness, “covariance risk,” which I construct as how countries' growth rates...

For three countries of similar economic characteristics, I ratify previous studies of the impact of fundamental macroeconomic and foreign exchange variables influencing country risk, as captured by the Emerging Market Bond Index (EMBI). I contribute to existing research, first by calculating a...