chapter 25 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 25 PowerPoint Presentation
Download Presentation
Chapter 25

Loading in 2 Seconds...

play fullscreen
1 / 16

Chapter 25 - PowerPoint PPT Presentation


  • 148 Views
  • Uploaded on

Chapter 25. International Diversification. Background. Global market US Market is 40% - 45% of all markets Improved access & technology New instruments Emphasis for our investigation Risk assessment Diversification. Issues.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 25' - katalin


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 25

Chapter 25

InternationalDiversification

25-1

background
Background
  • Global market
    • US Market is 40% - 45% of all markets
    • Improved access & technology
    • New instruments
  • Emphasis for our investigation
    • Risk assessment
    • Diversification

25-2

issues
Issues
  • What are the risks involved in investment in foreign securities?
  • How do you measure benchmark returns on foreign investments?
  • Are there benefits to diversification in foreign securities?

25-3

diversification benefits
Diversification Benefits

Evidence shows international diversification is beneficial

  • Possible to expand the efficient frontier above domestic only frontier
  • Possible to reduce the systematic risk level below the domestic only level

25-4

international investment choices
International Investment Choices
  • Direct stock purchases
  • American depository receipts
  • Mutual Funds
    • Open-end funds
    • Closed-end funds
    • WEBS

25-7

risks in international investing
Risks in International Investing

Political Risks

  • Expropriation of assets
  • Restrictions on foreign exchange
  • Political instability

25-8

risks in international investing1
Risks in International Investing

Foreign Exchange Risk

  • Variation in return related to changes in the relative value of the domestic and foreign currency
  • Total return = investment return & return on foreign exchange
  • Not possible to completely hedge a foreign investment

25-9

returns with fx
Returns with FX
  • Return in US is a function of two factors

1. Return in the foreign market

2. Return on the foreign exchange

25-10

returns with fx1
Returns with FX

(1 + rUS) = (1 + rFM) (1 + rFX)

rUS = return on the foreign investment in US Dollars

rFM = return on the foreign market in local currency

rFX = return on the foreign exchange

25-11

return example dollar appreciates
Return Example: Dollar Appreciates

Initial Investment : $100,000

Initial Exchange: $2.00/ Pound Sterling

Final Exchange:$2.10/ Pound Sterling

Return in British Security: 10%

Return in US Dollars

(1 + rUS) = (1.10) (1.05) = (1.155)

rUS = 15.5%

25-12

return example dollar depreciates
Return Example: Dollar Depreciates

Initial Investment : $100,000

Initial Exchange: $2/ Pound Sterling

Final Exchange: $1.85/ Pound Sterling

Return in British Security: 10%

Return in US Dollars

(1 + rUS) = (1.10) (.9250) = (1.0175)

rUS = 1.75%

25-13

measuring benchmark returns
Measuring Benchmark Returns
  • Indexes
  • EAFE Index
  • Issues in measuring performance
    • Weighting
    • Cross-Holdings
  • Other possibilities
    • Country and Region Funds

25-14

performance attribution with international investment
Performance Attribution with International Investment

Extension to consider additional factors

  • Currency selection
  • Country selection
  • Stock selection
  • Cash and bond selection

25-15

security analysis with international investments
Security Analysis with International Investments

Accounting rules and conventions complicate security analysis

  • Depreciation
  • Reserves
  • Consolidation
  • Taxes
  • P/E ratios

25-16