{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}


Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 16 INTERNATIONAL PORTFOLIO INVESTMENT CHAPTER OUTLINE I. Key Terminologies a) Risk analysis: standard deviation b) Capital asset pricing model c) Aggressive vs defensive stocks c) Correlation coefficients d) Portfolio return and risk e) Efficient frontier II. Benefits of International Diversification a) Risk diversification through international investment b) Risk-return characteristics of capital markets c) The selection of an optimal portfolio III. Methods of International Diversification a) International mutual funds b) American depository receipts c) Direct purchase of foreign securities d) Hedge funds e) Investment in US multinational companies f) Global investing IV. Summary 135
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
CHAPTER OBJECTIVE The basic message of Chapter 16 is that international stock and bond diversification can yield higher returns with less risk than investment in a single market. A major reason for such a case is that international investment offers a broader range of opportunities than domestic investment even in a market as large as the United States or Japan. This chapter stresses the following two points: (1) adding foreign securities to a purely domestic portfolio reduces the total risk of the portfolio because of a low correlation between foreign securities and the domestic market; (2) in the past, international portfolios could have yielded both a higher return and a lower volatility than purely domestic US portfolios. KEY TERMS AND CONCEPTS Standard deviation is a measure of dispersion that fits nicely as a technique of measuring risk. Coefficient of variation is a relative measure of dispersion and is the standard deviation divided by the average return. Capital asset pricing model (CAPM) assumes that the total risk of a security consists of systematic (undiversifiable) risk and unsystematic (diversifiable) risk. Systematic risk reflects overall market risk--risk that is common to all securities; this risk is undiversifiable. Unsystematic risk is unique to a particular company; this risk can be diversified away. Market portfolio is a group of risky securities such as Standard & Poor's 500 Stocks or London Financial Times 100 Stocks. Beta -- β j = [(R j - R f )/(R m - R f )]--is an index of volatility in the excess return of one security relative to that of a market portfolio; beta is a measure of systematic risk. Portfolio effect is defined as the extent to which unsystematic risks of individual securities tend to offset each other. Correlation coefficient measures the degree of correlation between two securities and varies from zero to ±1. Portfolio return is the expected rate of return on a portfolio of securities. Efficient portfolio is a portfolio that provides the smallest level of risk for a given level of return or the highest rate of return for a given level of risk.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}