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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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  1. Errunza, Vihang R. & Miller, Darius P., 2000. "Market Segmentation and the Cost of the Capital in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 577-600, December.
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  9. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
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Cited by:
  1. Guillaume Daudin & Kevin H O'Rourke & Matthias Morys, 2008. "Europe and Globalization, 1870-1914," Sciences Po publications 2008-17, Sciences Po.
  2. 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.
  3. 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.
  4. Crafts, Nicholas, 2012. "British relative economic decline revisited: The role of competition," Explorations in Economic History, Elsevier, vol. 49(1), pages 17-29.
  5. Rui P. Esteves, 2011. "The Political Economy of Global Financial Liberalisation in Historical Perspective," Oxford University Economic and Social History Series _089, Economics Group, Nuffield College, University of Oxford.
  6. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
  7. Nicholas Crafts & Tim Leunig & Abay Mulatu, 2010. "Were British railway companies well-managed in the early twentieth century?," Economic History Working Papers 27889, London School of Economics and Political Science, Department of Economic History.
  8. Kevin H. O’Rourke, 2012. "From Empire to Europe: Britain in the World Economy," Oxford University Economic and Social History Series _106, Economics Group, Nuffield College, University of Oxford.
  9. Crafts, Nicholas, 2011. "British Relative Economic Decline Revisited," CAGE Online Working Paper Series 42, Competitive Advantage in the Global Economy (CAGE).
  10. 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.
  11. Brian Mitchell & David Chambers & Nicholas Crafts, 2008. "How Good was the Profitability of British Railways, 1870-1912?," The Warwick Economics Research Paper Series (TWERPS) 859, University of Warwick, Department of Economics.
  12. repec:cge:warwcg:42 is not listed on IDEAS
  13. Campbell, Gareth, 2012. "Myopic rationality in a Mania," Explorations in Economic History, Elsevier, vol. 49(1), pages 75-91.
  14. Matthias Morys & Guillaume Daudin, 2008. "Globalization, 1870-1914," Economics Series Working Papers 395, University of Oxford, Department of Economics.
  15. 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.

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