International diversification
Assume that all investors are u.s. based and have some maximum standard deviation they are able to tolerate and are maximizing the expected return subject to not exceeding that standard deviation. There are investors with all kinds of maximum standard deviations. Furthermore, assume that investors can allocate their wealth across only two assets(or alternatively not invest at all). The first asset is the u.s. stock market index(S&P 500). The annual expected return in u.s. dollars is 15% and the corresponding standard deviation is 20%. The second asset is the Japanese stock market index(Nikkei 225). It has the annual expected return(again in U.S dollars) of 10% and the standard deviation of 30%. The correlation between returns of two assets is 0.20
a) Will there be any investors who will not invest ANY of their wealth into either apanese or US stock markets(that is will choose just to keep their money and not invest at all)? Please explain your answer.
b) Will there be any investors who will invest ALL of their wealth into the Japanese stock market? Please explain your answer
c) Will there be any investors who will invest a PART of their wealth into the Japanese stock market? Please explain your answer