Saturday, December 20, 2008

Australian vs. Foreign Shares

The chart shows the MSCI All Country World Index converted into Australian Dollars and EWA including dividends converted to AUD. From an Australian perspective, Australian shares have outperformed unhedged foreign shares over the last 12 years. But they have also been more volatile. I also show a couple of diversified portfolios with 33% and 50% foreign shares. The mix with the maximum Sharpe value is 100% Australian shares. Of course, the portfolio without an overweight to Australian shares on a global basis will be indistinguishable from the foreign share index.

These results show why, in addition to the tax benefits, Australian investors might rationally overweight Australian shares very dramatically in their portfolios.

Though hedged foreign shares follow a very different time path than unhedged ones, the Sharpe Ratio is still maximized by a 100% allocation to Australian shares if we consider this option as well.

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