Investments, tenth edition

   Constructing a Benchmark Portfolio of Foreign Assets 

 Active international investing, as well as passive, requires a benchmark portfolio (the 

bogey). One widely used index of non-U.S. stocks is the    European,  Australasia,  Far 

East (EAFE) index    computed by Morgan Stanley. Additional indexes of world equity 

performance are published by Capital International Indices, Salomon Brothers, Credit 

Suisse First Boston, and Goldman Sachs. Portfolios designed to mirror or even replicate 

the country, currency, and company representation of these indexes would be the obvious 

generalization of the purely domestic passive equity strategy. 

 An issue that sometimes arises in the international context is the appropriateness of 

market-capitalization weighting schemes in the construction of international indexes. 

Capitalization weighting is far and away the most common approach. However, some 

argue that it might not be the best weighting scheme in an international context. This is in 

part because different countries have differing proportions of their corporate sector orga-

nized as publicly traded firms. 

  Table 25.12  shows 1998 and 2011 data for market-capitalization weights versus GDP 

weights for countries in the EAFE index. These data reveal substantial disparities between 

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  C H A P T E R  

2 5

 International 

Diversification 

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