International Portfolio Investment 11 Chapter Ten Chapter Objective: This chapter discusses the gains from international portfolio diversification, which emerged as a major form of cross-border investment in the 1980s, rivaling foreign direct investment by firms. Chapter Outline:
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This chapter discusses the gains from international portfolio diversification, which emerged as a major form of cross-border investment in the 1980s, rivaling foreign direct investment by firms.
Portfolio Arithmetic – International Perspectives
Optimal International Portfolio Selection
International Mutual Funds: A Performance Evaluation
International Diversification through Country Funds
International Diversification with ADRs
International Diversification with WEBS
International Diversification with Hedge Funds
Why Home Bias in Portfolio Holdings
C$ gain or loss on British Investment: End of Period
Conditional Exchange rates $/£
Conditional Share values, £
Relatively low international correlations imply that investors should be able to reduce portfolio risk more if they diversify internationally rather than domestically.
Clearly the Japanese market is more sensitive to the world market than is the U.S.
(1996-2007, weekly data, annualized)
The optimal proportion of investment in foreign assets in any particular country is greater:
1. The greater is the expected return on foreign assets (recorded in terms of foreign currency) relative to expected returns on domestic assets.
2. The greater is the expected (real) appreciation of foreign currency against the investor’s home currency.
3. The lower is the risk (standard deviation) of returns on foreign assets (converted to the domestic investor’s currency) compared to the risk of domestic investment.
4. The smaller is the correlation coefficient between returns on foreign assets (converted to the domestic investor’s currency) and returns on domestic assets.
5. The lower is the domestic risk-free rate.
Country Benchmark Shares
Share in World Market Value
Proportion of Domestic Equities in Portfolio
100.0%The Home Bias in Equity Portfolios