Abstract
The international capital asset pricing model (ICAPM), based on traditional portfolio theory developed by Sharpe (1964) and Lintner (1965), suggests that, to maximize risk-adjusted returns, investors should hold a world market portfolio of risky assets. However, domestic assets are heavily weighted in investors’ portfolios even after the relaxing of capital control after 1980. For example, in 1997, 89.9 percent of US investors’ equity portfolios were domestic equities, while the size of the USA in world market capitalization was about 48.3 percent (Ahearne et al., 2004). The wide disparity between actual and recommended international equity portfolio weights constitutes the equity home bias, one of the unresolved puzzles in international finance literature.1
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© 2007 Fathi Abid and Slah Bahloul
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Abid, F., Bahloul, S. (2007). The Determinants of Domestic and Foreign Biases: An Empirical Study. In: Gregoriou, G.N. (eds) Asset Allocation and International Investments. Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230626515_3
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DOI: https://doi.org/10.1057/9780230626515_3
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