Seconomiccycle foreignmarketsmaynotbeasefficientasus

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Unformatted text preview: oefficients Various Why Use International Diversification? International Offers more diverse investment alternatives than U.S.­ only based investing Foreign economic cycles may move independently from U.S. economic cycle Foreign markets may not be as “efficient” as U.S. markets, allowing true gains from superior research Study done between 1984 and 1994 suggests that portfolio 70% S&P 500 and 30% EAFE would reduce risk 5% and increase return 7% over a 100% S&P 500 portfolio Components of Risk Components Diversifiable (Unsystematic) Risk – Results from uncontrollable or random events that are firm­specific – Can be eliminated through diversification – Examples: labor strikes, lawsuits Nondiversifiable (Systematic) Risk – – – Attributable to forces that affect all similar investments Cannot be eliminated through diversification Examples: war, inflation, political events Figure 5.8 Figure Portfolio Risk and Diversification Portfolio Portfolio Diversification Portfolio Beta: A Popular M...
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This note was uploaded on 10/31/2012 for the course ECON 435 taught by Professor Staff during the Fall '08 term at Maryland.

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