Investments, tenth edition

 Figure 25.11 

International diversification. Portfolio 

standard deviation as a percentage of the average 

standard deviation of a one-stock portfolio 

  Source: B. Solnik, “Why Not Diversify Internationally Rather 

Than Domestically.”  Financial Analysts Journal,  July/August 1974, 

pp. 48–54. Copyright 1995, CFA Institute. Reproduced and repub-

lished from  Financial Analysts Journal  with permission from the CFA 

Institute. 

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P A R T   V I I

  Applied Portfolio Management

actual realizations of the sample period returns on all assets. Obviously, we are talking 

about a slim to empty set of investors. For all other, less-than-clairvoyant investors, such a 

frontier may have value only for purposes of performance evaluation. 

 In the world of volatile stocks, some stocks are bound to realize large,  unexpected

average returns. This will be reflected in ex post efficient frontiers of enormous apparent 

“potential.” They will, however, suggest exaggerated diversification benefits. Such (elu-

sive) potential was enumerated in Chapter 24 on performance evaluation. It has no mean-

ing as a tool to discuss the potential for future investments for real-life investors.