ABSTRACT OF PAPER
Title: ‘Like the horses in a race’: Financial diversification before modern portfolio theory
Author: Rutterford Janette, Sotiropoulos Dimitris
From the 1870s there was an increased awareness among UK investors of the benefits of financial diversification – primarily putting equal amounts into a number of different securities – with much of the emphasis being on geographical rather than sectoral diversification and some limited discussion of avoiding highly correlated investments. The paper discusses textual evidence from a series of documents offering financial advice in the late 19th century and the beginning of 20th century of how investors perceived of risk and dealt with it in the Anglo-Saxon world. It also attempts a periodization of the historical diversification practices. In what was the financial center of the time, it is clear that UK investors understood the concept, if not the mathematics, of correlation and their behavior was consistent with recommendations by modern portfolio theory with regard to portfolio selection strategies. This issue is important for two reasons: it retraces ideas related to modern financial theory and sketches an alternative understanding of individual investment practices before Markowitz’s mathematical formulation in the 1950s; it also highlights an aspect of investor behavior which was left totally unnoticed by the mainstream economic theory of the time.
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