The following American Economic Review research by French and Poterba (2001) examines the home bias of international investors. Suppose there are only six countries in Table 1-the US, Japan, the UK, France, Germany, and Canada. The sum of their adjusted market values is $6,158.7. If you are a bias- free investor from the UK, then how much weight will your portfolio include the US stock market? Investor Diversification and International Equity Markets By KENNETH R. FRENCH AND JAMES M. POTERBA TABLE 1-EQUITY PORTFOLIO WEIGHTS: BRITISH, JAPANESE, U.S. INVESTORS Portfolio Weight Japan U.K Adi Market Value U.S. U.S. Since the fortunes of different nations do not always move together, investors can di- versify their portfolios by holding assets in several countries. The benefits of interna- tional diversification have been recognized for decades. In spite of this, most investors hold nearly all of their wealth in domestic assets. In this paper we use a simple model of investor preferences and behavior to show that current portfolio patterns imply that investors in each nation expect returns in their domestic equity market to be several hundred basis points higher than returns in other markets. The lack of diversification appears to be the result of investor choices, rather than institutional constraints. 0012 938 .0131 .059 52941.3 Japan .031 9811 048 1632.9 UK .011 0019 .820 849.8 France .005 .0013 .032 265.4 Germany .005 .0013 035 235.8 Canada .010 .006 233.5 Note: Estimates correspond to portfolio holdings in December, 1989. They are based on the authors' tabu- lations using data from the U.S. Treasury Bulletin and Michael Howell and Angela Cozzini (1990). Adjusted market values exclude intercorporate cross-holdings from total market value, and correspond to June 1990 values. O 0.478 or 47.8% O 0.059 or 5.996 O 0.138 or 13.896 O 0.938 or 93.896