INTERNATIONAL PORTFOLIO INVESTMENT

In 1990, two American finance professors — Harry Markowitz and William Sharpe — received the Nobel Prize in economic science because of their contribution to portfolio theory. A highly respectable mean–variance model developed by Markowitz (1959) and Sharpe (1964) employs two basic measures: an index of expected return (mean) and an index of risk (variance or standard deviation). The expected value for a portfolio of securities is simply the sum of the individual returns for the securities that make up the portfolio. The standard deviation as a measure of risk for the portfolio is not easily measured. In many business situations, risks of individual securities tend to offset each other. Thus, with successful diversification, the investor may select a portfolio having less risk than the sum of the risks of individual securities…