Achieving International Diversification with U.S. Multinational Equities

BA453 Professor Harvey․February 26, 1999

Rain Man Asset ManagementRob Christensen

Monte CombeJeff Kip

Mike McDuffieAmjad Muasher

Company Selection

• 150 largest U.S. equities (by market cap) with returns from 1/93 to 12/98

• Sorted into three portfolios (high, middle, low) by ratio of foreign sales to total sales

Company Selection

• Selection problems- Traceability of foreign revenue- Industry selection bias

• Industries removed from sample:- Financial services except for insurance- Utilities- Telecommunications

Tests for Diversification Benefits

PortfolioReturn

(Annualized)1/93-12/98

StandardDeviation1/93-12/98

High 31.7% 14.1%

Middle 30.7% 13.9%

Low 31.0% 14.6%

Tests for Diversification Benefits

PortfolioBeta

(U.S. Equity)1/93-12/98

Adj RSquared

(U.S. Equity)1/93-12/98

High 1.02 88.0%

Middle 1.01 86.7%

Low 0.98 80.6%

Tests for Diversification Benefits

PortfolioBeta

(World Eq.)1/93-12/98

Adj RSquared

(World Eq.)1/93-12/98

High 0.86 58.6%

Middle 0.92 67.5%

Low 0.88 61.5%

Selection Bias

• Each portfolio beats the U.S. equity return

• “winner’s bias” from selecting only largest market capitalization equities

Conclusion

• No diversification from buying “diversified” U.S. Equities