World, Country, and Industry Relationships in Equity Returns: Implications for Risk Reduction through International Diversification

Because a few large countries represent the bulk of the market value in the world portfolio, they contribute importantly to its overall risk. In an integrated world capital market--as opposed to one segmented by discriminatory taxation, currency controls, or even investor timidity--any portfolio that ducks its full share of the risk specific to these countries will suffer a disproportionate sacrifice in expected return.