PORTFOLIO DECISIONS WITH INFORMATION AND INTERNATIONAL CURRENCY FRICTIONS

Portfolio decision problems have been the focus of research for decades. Many investors nowadays are aware of the benefits of adding foreign assets to a portfolio. These benefits include diversification, “don't put all your eggs in one basket”, and hedging, which serves the same purpose as buying insurance. However, the empirical findings suggest that instead of holding the fully diversified portfolio suggested by financial theory, investors are tilted more heavily towards domestic asset positions. This...
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