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British Investment Overseas 1870-1913: A Modern Portfolio Theory Approach

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  • William Goetzmann
  • Andrey Ukhov

Abstract

Many scholars have asked whether British investors benefited from overseas investment investing in the 19th century and whether this export of capital had negative effects. We re-visit the issue using modern portfolio theory. We examine the set of investment opportunities available to British investors, the developments in information transmission technology, and advances in financial and investment theory at the time. We use meanvariance optimization techniques to take into account the risk and return characteristics of domestic and international investments available to a British investor, and to quantify the benefits from international diversification. Evidence suggests that capital export was a consequence of both the opportunity and the understanding of diversification. Foreign assets offered higher rates of return, but equally important, they offered significant diversification benefits. Even when - by setting expected return on each foreign asset class equal to that of the corresponding UK asset class - we put foreign assets at a disadvantage, we find that it was rational for a British investor to include foreign debt and equity in the portfolio.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm445.

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Date of creation: 01 Mar 2005
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Handle: RePEc:ysm:somwrk:ysm445

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Keywords: International Diversification; Modern Portfolio Theory; International Investment Flows; British Overseas Investment;

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References

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Citations

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Cited by:
  1. Campbell, Gareth, 2012. "Myopic rationality in a Mania," Explorations in Economic History, Elsevier, vol. 49(1), pages 75-91.
  2. Matthias Morys & Guillaume Daudin, 2008. "Globalization, 1870-1914," Economics Series Working Papers 395, University of Oxford, Department of Economics.
  3. Burhop, Carsten & Chambers, David & Cheffins, Brian, 2014. "Regulating IPOs: Evidence from going public in London, 1900–1913," Explorations in Economic History, Elsevier, vol. 51(C), pages 60-76.
  4. Brian Mitchell & David Chambers & Nick Crafts, 2011. "How good was the profitability of British railways, 1870–1912?," Economic History Review, Economic History Society, vol. 64(3), pages 798-831, 08.
  5. Oscar Bernal Diaz & Kim Oosterlinck & Ariane Szafarz, 2008. "Observing bailout expectations during a total eclipse of the sun," Working Papers CEB 08-015.RS, ULB -- Universite Libre de Bruxelles.
  6. Crafts, Nicholas, 2011. "British Relative Economic Decline Revisited," CEPR Discussion Papers 8384, C.E.P.R. Discussion Papers.
  7. Rui Esteves, 2011. "The Political Economy of Global Financial Liberalisation in Historical Perspective," Economics Series Working Papers Number 89, University of Oxford, Department of Economics.
  8. repec:cge:warwcg:42 is not listed on IDEAS
  9. Turner, John D., 2014. "Financial history and financial economics," QUCEH Working Paper Series 14-03, Queen's University Centre for Economic History, Queen's University Belfast.
  10. Kevin Hjortshøj O'Rourke, 2012. "From Empire to Europe: Britain in the World Economy," Economics Series Working Papers Number 106, University of Oxford, Department of Economics.
  11. Benjamin Chabot & Christopher J. Kurz, 2009. "That's Where the Money Was: Foreign Bias and English Investment Abroad, 1866-1907," Working Papers 972, Economic Growth Center, Yale University.
  12. Nicholas Crafts, 2010. "Cliometrics and technological change: a survey," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 17(5), pages 1127-1147.
  13. Crafts, Nicholas, 2012. "British relative economic decline revisited: The role of competition," Explorations in Economic History, Elsevier, vol. 49(1), pages 17-29.
  14. Nicholas Crafts & Tim Leunig & Abay Mulatu, 2007. "Were British railway companies well-managed in the early twentieth century?," Economic History Working Papers 22549, London School of Economics and Political Science, Department of Economic History.
  15. Guillaume Daudin & Kevin H O'Rourke & Matthias Morys, 2008. "Europe and Globalization, 1870-1914," Sciences Po publications 2008-17, Sciences Po.

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