The share of portfolios, whether of individual investors or of corporations, invested in international assets has been increasing. Given the increased mobility of capital across borders and investors' desire for diversification, this fact is not surprising. While we have observed the increased internationalization of portfolios, a good model of how individuals allocate their wealth across assets does not exist except for very restrictive cases. These cases are far from what we observe and indeed standard models fare poorly at predicting the international asset allocations of individuals.
Firms invest in various countries for many reasons, one of which is diversification.
An understanding of how individual investors diversify their wealth holdings can help managers decide whether a new investment will enhance or diminish the attractiveness of their stock to investors. It may be easier for an investor to diversify into a new country through a firm he already holds shares of than for him to purchase shares in a local firm directly. For example, a firm may be able to buy or sell a foreign asset more easily than an individual for reasons related to the absolute size of the investment. The goal of this project is to solve the optimal portfolio problem for an international investor who faces many of the added risks mentioned above. The predictions of the model will then be compared to data.