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

  • William N. Goetzmann
  • Andrey Ukhov

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 mean-variance optimization techniques ot take into account the risk and return characteristics of domestic and international investments available to a British investor, and to quantify the beneifts 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 debts and equity in the portfolio.

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File URL: http://www.nber.org/papers/w11266.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11266.

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Date of creation: Apr 2005
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Publication status: published as Goetzmann, William N. and Andrey D. Ukhov. "British Investment Overseas 1870-1913: A Modern Portfolio Theory Approach," Review of Finance, 2006, v10(2,Jun), 261-300.
Handle: RePEc:nbr:nberwo:11266
Note: AP IFM PR
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  1. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
  2. Kaukiainen, Yrj, 2001. "Shrinking the world: Improvements in the speed of information transmission, c. 1820 1870," European Review of Economic History, Cambridge University Press, vol. 5(01), pages 1-28, April.
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  8. 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.
  9. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1851-1872, September.
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