International Investment and Exchange Rate Risk: An Experimental Analysis / Eine experimentelle Untersuchung zur internationalen Vermögensdiversifikation

Summary The experimental evidence gathered in this study indicates that a preference for domestic investments exists even under fixed exchange rates and in the absence of factors commonly understood to give rise to asymmetric portfolios. Adding exchange rate risk does not - contrary to theory - induce many individuals to hold more domestic assets. Non-professional investors in particular are prone to make choices at variance with the normative theory. This is traced back to misjudgments concerning the available risk-return trade-offs. It is also documented that flexibility of the exchange rate induces economic losses through inefficient portfolio choice. This even holds in a situation where exchange rate risk can be avoided by costless hedging.