Investments, tenth edition

  

  2002–2011  

  1967–2001  

 World  

0.97  

0.95 

 World (excluding U.S.) 

 0.90  

NA 

 Germany  

0.89  

0.75 

 Netherlands  

0.88  

0.71 

 France  

0.88  

0.70 

 United Kingdom 

 0.87  

0.83 

 Sweden  

0.86  

0.73 

 Australia  

0.82  

0.71 

 Italy  

0.82  

0.55 

 Canada  

0.80  

0.82 

 Spain  

0.79  

0.65 

 Switzerland  

0.79  

0.65 

 Belgium  

0.79  

0.46 

 Denmark  

0.78  

0.67 

 Norway  

0.78  

0.63 

 Austria  

0.74  

0.46 

 Hong Kong 

 0.69  

0.67 

 Japan  

0.56  

0.58 

  NA  5  not available.  

 Source: Datastream   online.thomsonreuters.com/datastream   ;  

1970–1989: Campbell R. Harvey, “The World Price of Covariance 

Risk,”  Journal of Finance  46 (March 1991), issue 1, pp. 111–58. 

Table 25.10

Correlation of foreign 

investments with U.S. 

returns over time 

(dollar-denominated 

excess returns)

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international diversification. These benefits 

accrue not from reduction in standard devia-

tion but rather from improved risk-adjusted 

performance.    

  Misleading Representation 

of Diversification Benefits 

 

The baseline technique for constructing effi-

cient portfolios is the efficient frontier. A useful 

efficient frontier is constructed from  expected

returns and an estimate of the covariance matrix 

of returns. This frontier combined with cash 

assets generates the capital allocation line, the 

set of efficient complete portfolios, as elabo-

rated in Chapter 7. The benefit from this effi-

cient diversification is reflected in the curvature 

of the efficient frontier. Other things equal, the 

lower the covariance across stocks, the greater 

the curvature of the efficient frontier and 

the greater the risk reduction for any desired 

expected  return. So far, so good. But suppose 

we replace  expected  returns with  realized   aver-

age returns from a sample period to construct 

an efficient frontier; what is the possible use of 

this graph? 

 

The ex post efficient frontier (derived from 

realized returns) describes the portfolio of only 

one investor—the clairvoyant who actually predicted the precise averages of realized 

returns on all assets and estimated a covariance matrix that materialized, precisely, in the