FIN 321 Weekly Assignment # 6b

FIN 321 Weekly Assignment # 6b - Nabila Dehlavi 11/11/10...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Nabila Dehlavi 11/11/10 Weekly Assignment # 6b Chapter 16 Question: 1 Diversification Benefits. How does the diversification of a portfolio change its expected returns and expected risks? Is this in principle any different for internationally diversified portfolios? The diversification of a portfolio results primarily in the reduction of risk. For a domestic portfolio, the diversification of the portfolio results in a weighted average expected return, but a reduction in risk as the returns of individual securities will be less than perfectly correlated. This principle also applies to international diversification, but the definition of the “market” is expanded with many new securities with their respective risks, returns, and correlations being added. The other added component of international diversification is the introduction of currency risk. 9 Correlation Coefficients. The benefits of portfolio construction, domestically or internationally, arise from the lack of correlation among assets and markets. The increasing globalization of business is expected to change these correlations over time. How do you believe they will change and why? Many experts have expected the correlations between markets to slowly but steadily increase over time as the world “globalizes.” There are, however, many political and institutional frictions and barriers, which may cause this to be a very, very long process. One important development over the past decade complicates this process. While more and more countries have opened their markets to foreign investors, firms, more, and more of the world’s publicly traded firms are listing and trading in the world’s primary equity markets of London and New York in addition to their individual domestic equity markets. This reduces market segmentation, increases correlation, and increases liquidity. 13 ADRs versus Direct Holdings. When you are constructing your portfolio, you know you want to include Cementos de Mexico (Mexico), but you cannot decide whether you wish to hold it in the form of ADRs traded on the NYSE or directly through purchases on the Mexico City Bolsa. a. Does it make any different in regard to currency risk? Risk is the same. b. List the pros and cons of ADRs and Direct purchases. ADRs convey certain technical advantages to U.S. shareholders. Dividends paid by a foreign firm are passed to its custodial bank and then to the bank that issued the ADR. The issuing bank exchanges the foreign currency dividends for U.S. dollars and sends the dollar dividend to the ADR holders. ADRs are in registered form, rather than in bearer form. Transfer of ownership is facilitated because it is done in the United States in accordance with U.S. laws and procedures. In the event of death of a shareholder, the estates need not to go through probate in a foreign court system. Normally, trading
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/25/2011 for the course FIN 320 taught by Professor Mercury during the Fall '10 term at Central Connecticut State University.

Page1 / 5

FIN 321 Weekly Assignment # 6b - Nabila Dehlavi 11/11/10...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online