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

William N. Goetzmann, Andrey Ukhov

NBER Working Paper No. 11266
Issued in April 2005
NBER Program(s):Asset Pricing, International Finance and Macroeconomics, Productivity, Innovation, and Entrepreneurship

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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Document Object Identifier (DOI): 10.3386/w11266

Published: 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. citation courtesy of

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