Global Portfolio Diversification from a Eurozone Investor’s Perspective

In this paper, we investigate global portfolio diversification from a Eurozone investor’s perspective. We examine whether it adds value for Eurozone investors to have flexibility in the regional weights of a global equity portfolio instead of basing them on the regional allocation of global stock market indices. We do this by comparing portfolios based on the regional allocation in global stock market indices with various alternative portfolios. We furthermore investigate whether it adds value for Eurozone bond investors to diversify into U.S. bonds by analysing the source of the correlation between U.S. and Eurozone bonds, their hedging qualities and portfolios composed of these bonds. We find that following the regional allocation of global stock market indices is not always ideal. In particular, we find that it can add value to invest less in U.S. equity and more in Canadian, Swiss and Indian equity. We do not find that Eurozone bond investors should diversify into U.S. bonds: U.S. bonds are generally not found to have higher hedging qualities than Eurozone bonds and portfolio optimisation results large allocations to Eurozone bonds.