f55 ER Ch15 International Portfolio Investments

f55 ER Ch15 International Portfolio Investments -...

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11/30/2010 1 Chapter Objective: 15 Chapter Fifteen International Portfolio Investment Background: An overview of portfolio theory and asset pricing models Why investors diversify their portfolios internationally. How much investors can gain from international diversification. The effects of fluctuating exchange rates on international EUN / RESNICK Fifth Edition The effects of fluctuating exchange rates on international portfolio investments. Whether and how much investors can benefit from investing in U.S. based international mutual funds. The reasons for “home bias” in portfolio holdings. 15-0 Chapter Outline An overview of portfolio theory and asset pricing models International Correlation Structure and Risk Diversification Optimal International Portfolio Selection Effects of Changes in the Exchange Rate International Bond Investment International Mutual Funds: A Performance Evaluation International Diversification through Country Funds International Diversification with ADRs International Diversification with ETFs Why Home Bias in Portfolio Holdings? 15-1
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11/30/2010 2 Overview of portfolio theory and asset pricing models (1) Measuring risk and returns Rl f i ik d t Rules for comparing risk and returns Given returns minimize risk Given risk maximize returns Coefficient of variation Return = risk free rate + risk premium Measuring risk and returns of a portfolio 15-2 Graphing portfolio characteristic in a risk and returns space Role of correlation Coefficients (+, -, 0) Adding a risk free asset to a risky portfolio Overview of portfolio theory and asset pricing models (2) Many risky portfolios and risk-free asset St i T h Separation Theorem Capital Market Line (CML): Pricing a diversified risky portfolio Total Risk = Unsystematic Risk (UR) + Systematic Risk (SR) What determines SR 15-3 Why is SR important Beta = SR
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11/30/2010 3 Overview of portfolio theory and asset pricing models (3) Capital Asset Pricing Model (CAPM) Why is CAPM a pricing model? Sharp measure of portfolio performance: [E(R p ) – R f ] / σ p E(R p ) = Expected return on portfolio p R f = Risk free rate 15-4 σ p = standard deviation of the portfolio p’s return International Correlation Structure and Risk Diversification Security returns are much less correlated across countries than within a country. This is so because economic, political, institutional, and even psychological factors affecting security returns tend to vary across countries, resulting in low correlations among international securities. Business cycles are often high asynchronous across countries. 15-5
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11/30/2010 4 International Correlation Structure Stock Market A FR GM JP NL SW UK US Australia .59 Relatively low international correlations France .29 .58 Germany .18 .31 .65 Japan (JP) .15 .24 .30 .42 Netherlands .24 .34 .51 .28 .62 imply that investors should be able to reduce portfolio risk more if they diversify internationally rather than domestically.
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This note was uploaded on 04/15/2011 for the course FINA 5500 taught by Professor Staff during the Spring '08 term at North Texas.

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f55 ER Ch15 International Portfolio Investments -...

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