Globe editors have posted this research report with permission of S&P Dow Jones Indices. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:
The absence of sufficient sector and stock diversification in the Canadian market has investment implications for Canadian investors with domestic equity allocations that are in line with the benchmark sector exposures. With the benchmark returns driven primarily by the returns of three sectors (energy, materials and financial), Canadian investors are subject to the peak and trough in the commodity and energy price cycles.
Canadian investors may want to consider diversification a key component of asset allocation decisions. Portfolio theory suggests that globally diversified portfolios dominate domestic-only ones on the efficient frontier. The results demonstrate that historically, investors who have had a strong home-bias have managed to earn higher risk-adjusted returns by incrementally increasing exposure to international equities.
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