Investments, tenth edition

 Figure 25.15 

Beta and SD of portfolios against deviation of monthly return over September–December 

2008 from average return over 1999–2008 

  Source: Authors’ calculations. 

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

217.0

SD of Monthly Returns, 1999–2008

215.0

213.0

Deviation from Average Return

211.0

29.0

27.0

0

0.2

Beta against U.S.

0.4

0.6

0.8

1

1.2

1.4

1.6

Market

USA

2.47 

28.31 

27.84 1 

4.81

World largest six (non–U.S.) markets

2.16 

27.51 

27.35 0.77 4.71

EU developed markets

2.05 

210.34 

210.29 1.06 6.08

Other Europe developed markets  .14 

27.59 

27.73 0.82 4.95

Australia 

1 Far East

0

1

.

29.29 

29.38 1.04 6.21

Emerging Far East 

1 South Africa .20 

29.70 

29.90 1.01 7.10

Emerging Latin America

0

8

.

211.72 

212.52 1.27 7.83

Emerging markets in Europe .90 

215.43 

216.32 1.38 9.54

World minus U.S. (48 countries by cap)  .01 

28.79 

28.81 0.91 5.19

World portfolio (by country cap)

2.15 

28.60 

28.45 0.94 4.88

1999–2008 2008: Sept.–Dec.

Average Monthly Return

Deviation

from Average

Beta on

U.S.

SD

SD

Beta on U.S.

  We focus first on investors who wish to hold largely passive portfolios. Their objective is 

to maximize diversification with limited expense and effort. Passive investment is simple: 

Rely on market efficiency to guarantee that a broad stock portfolio will yield the best pos-

sible Sharpe ratio. Estimate the mean and standard deviation of the optimal risky portfolio, 

and select a capital allocation to achieve the highest expected return at a level of risk you 

are willing to bear. But now, a passive investor must also decide whether to add an interna-

tional component to the more convenient home-country index portfolio. 

 Suppose the passive investor could rely on efficient markets as well as a world 

CAPM. Then the world capitalization–weighted portfolio would be optimal. Abiding 

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P A R T   V I I

  Applied Portfolio Management

by this theoretically simple solution is also practical. A world index fund would do 

the trick. Over the decade ending in 2011, the performance of the world portfolio and 

that of a U.S.-only portfolio can be summarized (using statistics from  Table  25.9 ) as 

follows: