International diversification through Swedish MNEs : An empirical study of risk-return dynamics of Swedish MNE, domestic equity, and global fund portfolios

The importance of diversification has been recognized for decades, with the presence of relatively high positive correlations within economies justifying international diversification. By investing in foreign securities, investor can reduce the variance of their portfolios, evident in the consistent decline of portfolio variance across all return levels as the investment universe expands globally. Despite the well-documented benefits of international diversification, investors exhibit a strong preference for domestic equities over foreign ones, a phenomenon known as home bias. Multinational enterprises (MNEs) have been proposed as a potential pathway for overcoming the diversification limitations posed by home bias, possibly offering international exposure within the domestic market. By constructing and comparing efficient frontiers and Sharpe ratios for domestic, MNE, and global portfolios between 2020 and 2023, this study evaluates the relative performance and diversification benefits of MNEs. While MNEs outperform domestic portfolios in the mean- variance space, they only exceed them in the Sharpe ratio within the tangency portfolio under longer investment horizons. The international portfolio achieves the highest Sharpe ratio, with statistically significant results for the tangency portfolio. Overall, the findings suggest that MNEs offer a practical and accessible alternative for investors seeking global exposure without leaving the domestic market.