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

58 Pages Posted: 28 Mar 2005  

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Andrey Ukhov

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: November 8, 2004


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.

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

JEL Classification: N24

Suggested Citation

Goetzmann, William N. and Ukhov, Andrey, British Investment Overseas 1870-1913: A Modern Portfolio Theory Approach (November 8, 2004). Yale ICF Working Paper No. 05-03. Available at SSRN:

William Goetzmann

Yale School of Management - International Center for Finance ( email )

165 Whitney Ave.
P.O. Box 208200
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrey Ukhov (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

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