7-1 - THE LE CHTELIER PRINCIPLE IN THE MARKOWITZ QUADRATIC...

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THE LE CHÂTELIER PRINCIPLE IN THE MARKOWITZ QUADRATIC PROGRAMMING INVESTMENT MODEL: A Case of World Equity Fund Market Chin W. Yang Department of Economics Clarion University of Pennsylvania Clarion, Pennsylvania 16214 Tel: 814 393 2627 Fax: 814 393 1910 E-mail: [email protected] Ken Hung Department of Finance National Dong Hwa University Hualien, Taiwan 97441 Tel: +886 3 863 3134 Fax: +886 3 863 3130 E-mail: [email protected] Jing Cui Clarion University of Pennsylvania Clarion, Pennsylvania 16214 Tel: 814 221 1716 E-mail: [email protected] ABSTRACT 1
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Due to limited numbers of reliable international equity funds, the Markowitz investment model is conceptually ideal and computationally efficient in constructing an international portfolio. Overinvestment in one or several fast-growing markets can be disastrous as political instability and exchange rate fluctuations reign supreme. We apply the Le Châtelier principle to international equity fund market with a set of upper limits. Tracing out a set of efficient frontiers, we inspect the shifting phenomenon in the mean-variance space. The optimum investment policy can be easily implemented and risk minimized. Keywords: Markowitz quadratic programming model, Le Châtelier principle, international equity fund and added constraints. 2
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The Le Châtelier Principle in the Markowitz Quadratic Programming Investment Model: A Case of World Equity Fund Market I. INTRODUCTION As the world is bubbling in the cauldron of globalization, investment in foreign countries ought to be considered as part of an optimum portfolio. Needless to say, returns from such investment can be astronomically high as was evidenced by several international equity funds in the period of the Asian flu. On the flop side, however, it may become disastrous as political system and exchange rate market undergo structural changes. The last decade has witnessed a substantial increase in international investments partly due to “hot money” from OPEC, People’s Republic of China and various types of quantum funds, many of which are from the US. From the report of Morgan Stanley Capital International Perspectives, North America accounted for 51.6% of would equity market. Most recently, however, European Union begins to catch up with the US. Along with booming Asian economies, Russia, India and Brazil are making headway into world economic stage. In addition, Japanese economy has finally escaped from the decade-long depression. Obviously, the opportunities in terms of gaining security values are much greater in the presence of international equity markets. Unlike high correlation between domestic stock markets (e.g., 0.95 between the New York Stock Exchange and the S&P index of 425 large stocks), that between international markets is rather low. For example, correlations between the stock indexes between the US and Australia, Belgium, Germany, Hong Kong, Italy, Japan and Switzerland were found to be 0.505, 0.504, 0.489, 0.491, 0.301, 0.348 and
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7-1 - THE LE CHTELIER PRINCIPLE IN THE MARKOWITZ QUADRATIC...

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