United States equity mutual funds and international diversification.
Date of Award
College of Liberal Arts
Bachelor in Arts
This paper examines the United States equity mutual funds to understand the existence of home bias in their portfolios through institutional and behavioral factors. This home bias contradicts the Modern Portfolio Theory, which attempts to maximize portfolio expected return for a given amount of portfolio risk or equivalently minimize risk for a given level of expected return, by bringing a variation in the kind of assets included in the portfolio. Thus, I argue that the home bias keeps mutual fund portfolios from the benefits that international diversification brings with it. For this, I have collected data of top performing domestic and global mutual funds through Morning Star and Bloomberg that allows me to look into their performance and risk pattern from 2005-2014. The results show domestic equity mutual funds acquiring higher returns accompanied by higher volatility in most time period, but the global funds have outperformed them in the times of financial crisis and during the most recent years. Thus, through research on available financial literature and data analysis I emphasize the importance of international diversification that would lower non-systematic risks in equity mutual fund portfolios and allow them to perform better in times of domestic financial crisis. JEL Classifications: C12, G01, G11.
Bhattarai, Priyanka, "United States equity mutual funds and international diversification." (2015). Drew Theses and Dissertations. 40.