International Diversification: Simple or Optimization Strategies?

Abstract

We empirically assess a variety of portfolio construction strategies using MSCI country indices from 1998 to 2010. These strategies range from the classic mean-variance optimization strategy to simple allocation strategies, such as equally weighted and dividend-yield-weighted portfolios. We find that for a global equity portfolio consisting of country indices, the simple allocation strategies deliver better out-of-sample performance despite the addition of short-sale and over-weighting constraints. We further show that the simple allocation strategies achieve higher risk-adjusted returns than the standard portfolio optimization strategies in the four-factor model. Our results provide empirical evidence that keeping portfolio construction strategies simple is very important in practice.