Optimise to Beat the Benchmark : International Portfolio Diversification Revisited

iii Evidence for the benefits of international over domestic portfolio diversification is still mixed. In part, this may be due to different methodologies employed. There has recently been a resurgence of interest in Markowitz allocation methods in preference to alternatives such as index models. Accordingly, this paper examines international portfolio optimisation using the full Markowitz method on daily data for 29 countries over the period January 1988 – December 1999. Our bottom line is that the resulting allocations matched, or beat, benchmark indices. This resulted from an out of sample comparison of returns and a return/risk measure (the Sharpe ratio) calculated on a quarter-by-quarter basis after addressing a number of methodological issues of importance in this kind of analysis.