This study looks for gains in terms of
efficiency for local investors with an
internationally diversified portfolio
by hedging the exchange risk. To
estimate an optimum portfolio with a
minimum variance we used a robust
methodology which allowed us to
make statistical inference and prove
that international diversification reduces portfolio risk for local investors.
This methodology is applied to stock
portfolios held by a Colombian and a
Mexican investor, and the conclusion
is that hedging exchange rate risk
can reduce the risk of the portfolio,
with the possible exception of a high
negative correlation between the exchange rate and the local stock index.
