INTERNATIONAL INVESTMENT DIVERSIFICATION BEFORE AND AFTER THE OCTOBER 19, 1987 STOCK-MARKET CRISIS

International investment is rapidly growing throughout the world. U.S. investors are attracted by the risk diversification benefits as well as the higher return provided by many non-U.S. markets. Risk diversification, for U.S. investors, is dependent upon the correlation between the U.S. and foreign markets. The objective of this study is to quantify the returns, risks, and correlation coefficients of the dollar value of returns on various foreign equity markets with returns on the U.S. market for two periods: before and after the October 19, 1987 stock market crisis. Based on the empirical study, a dramatic increase in correlation coefficients was found between the U.S. and foreign markets. In addition, the rates of return were generally lower and the investment risks, reflected in the standard deviation, are higher. These findings will have a significant impact upon the risk diversification, portfolio balancing, and asset allocation policies of U.S. institutional investors. © 1991.