Portfolio Theory and Foreign Investment ? The Role of Non-Marketed Assets

Far from thinking the extent of foreign investment in Australia is large, economists ought perhaps be surprised that the extent is not greater. Certainly, portfolio diversification theory would seem to predict Australians would own a small share of their marketable wealth in Australian marketed assets. We show that when domestic residents in a small open economy possess non-marketable wealth (so that securities markets are not complete), domestic marketed assets may be disproportionately demanded by residents to hedge their non-marketed risks.