world portfolio in 2000. Exhibit 11.2 shows similar percentages for the various pub-
licly traded bond markets in 1999.
In 2000 the largest equity market was the United States, which represented 50% of
the total. The second largest was Japan with 13% of the world market. All of the Eu-
ropean markets combined accounted for about 33% of the world market.^1 Exhibit 11.2
shows that the U.S. bond market represented 47% of the world value and the Euro-
pean Monetary Union bond market was 23% of world value. Next was Japan with
18.3% of the world market.
Even for U.S. investors a large part of the investment opportunities lie outside the
domestic market. For investors from any other country the opportunities (in terms of
the market value of securities) outside the home country are much greater than those
within the country of domicile. Thus for all investors a large part of the world’s
wealth lies outside the investor’s home country. International assets could be dupli-
cates of those found in the home country, in which case they do not offer new op-
portunities, or they could represent opportunities not duplicated in the home country.
Which of these possibilities holds needs to be analyzed in order to determine whether
international diversification should be an important part of each investor’s portfolio.
To examine this question we need to analyze the correlation between markets and the
risk and return of each market. But before we do this we must first examine how to
calculate returns on foreign investments.
11.3 CALCULATING THE RETURN ON FOREIGN INVESTMENTS. The return on a
foreign investment is affected by the return on the assets within its own market and
the change in the exchange rate between the security’s own currency and the currency
11.3 CALCULATING THE RETURN ON FOREIGN INVESTMENTS 11 • 3Area or Country Percent of Total
United States 47.0%
Euroland 22.9%
Japan 18.3%
United Kingdom 3.0%
Canada 1.7%
Switzerland 0.9%
Denmark 0.8%
Australia 0.6%
Sweden 0.6%
Norway 0.2%
New Zealand 0.1%
Asia 2.3%
Latin America 0.8%
Eastern Europe/Middle East/Africa 0.7%
Total 100.0%Source:From Salomon Brothers.Exhibit 11.2. Comparative Sizes of Major Bond Markets 1999.
(^1) The percentage shown for Japan is an overstatement since Japanese companies have a greater ten-
dency to own other companies than do companies in other countries and thus have more double counting.