Benefits over 3 decades from foreign investment by Icelanders

Abstract

Listed foreign securities improve the historical ratio of return to risk for Icelandic investors, including pension funds. When risk is measured by standard deviation foreign assets improve the ratio by 34% over that of a domestic portfolio. In particular, average return in excess of the risk-free rate increases by 0.93 percentage points (from 2.76 to 3.70%) for an optimal portfolio with a 10% standard deviation with such a portfolio having comparable risk due to high-risk foreign bonds as due to foreign shares. Including unlisted foreign securities improves the ratio even more but that finding is subject to considerable estimation error. The odds of extreme events (kurtosis) are reduced considerably by including foreign securities.