Friday, November 23, 2007

Learning This Should be a Requirement for Every Degree Everywhere

Bryan Caplan on exchange rates, (he's talking about the US dollar but this applies everywhere)

Two years ago I denounced home country bias, people's propensity to invest solely in their own country's assets. International diversification is a free lunch in terms of mean-variance efficiency, but most of us pass on it. As Karen Lewis explains:

Indeed, a portfolio of 100% share in the S&P 500 is dominated by all portfolios with foreign share of about 39% corresponding to the minimum variance point B. Nevertheless, estimates from the literature put the share of US holdings of foreign equities at about 8%...

An added benefit which I didn't mention is that international diversification protect you against exchange rate fluctations. Yes, if you'd listened to me, the falling dollar wouldn't be nearly as worrisome. In fact, if you'd taken Karen Lewis' results to heart, at least 39% of your assets would be held in foreign assets - and a falling dollar would be something to celebrate.

Just don't do it publicly - or people might accuse you of being un-American!

--There you go, we really do need to get rid of the idea that a currency is some how a countries stock price, it temps politicians into creating bad policies.

1 comment:

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