Abstract Like any other form of business or enterprise, investing internationally is a risk that can be turned into opportunity once well managed. There is a veritable sea of benefits in international portfolio investment. These include participation in the growth of other countries, hedging against exchange rate exposure to risk, diversification benefits and advantages (abnormal returns) of market segmentation on a global scale. However, we cannot be so overwhelmed by the payoff of international portfolio investment as to overlook the bitter side of it. In an international environment, financial investments are not only subject to currency risk and political risk, but also to many institutional constraints and barriers. What are crucial in international portfolio investment are optimal portfolio allocation and the associated market and currency risks. Diversification into multiple securities can practically eliminate potential severe losses from any individual security. However, domestic diversification cannot remove systematic market risk due to high correlations among most domestic securities. Since market risk differs from country to country, international diversification can reduce substantially the overall risk exposure of investment portfolios.

Introduction and Overview Increased global competition and opportunity have attracted many national economies and individual domestic businesses to the international markets. In recent years international investing has received a boost from rapid advancements in international transport and communication, globalization of national economies in their various aspects (commerce, institutions, ownership structure, capital and knowledge), major trade liberalization/deregulation, removal of capital exchange controls, change in consumer tastes (consumers’ increased willingness to