Professional Documents
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International Portfolio
Investment
Chapter Objective:
15
Chapter Fifteen
Chapter Outline
15-1
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15-2
15-3
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15-4
15-5
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Australia
A
U
.59
France
.29
29
Germany
.18
Japan (JP)
.15
FR
GM
JP
NL
SW
UK
US
Netherlands .24
.34
.51
.28
rather
.62 than domestically.
Switzerland .36
.37
.48
.28
.52
.66
United
Kingdom
United
States
15-6
.32
.38
.30
.21
.39
.43
.70
.30
.23
.17
.14
.27
.27
.28
.44
Portfolio Risk (%
P
%)
0.44
Swiss stocks
0 27
0.27
U.S. stocks
International stocks
0.12
1
10
20
30
40
50 Number of
Stocks
15-7
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15-8
Stock Market
CN
FR
GM
JP
SD
((%))
1.07
5.55
Countryy
stock
market
vs. world
1.00
1.20
6.00
1.04
1.19
6.29
1.03
0.92
6.53
1.10
1.19
5.20
0.97
1.11
4.25
0.88
UK
Canada (CN)
France (FR)
0.49
Germany
(GM)
0.46
Japan (JP)
0.34
0.40
0.32
United
Kingdom
0.59
0.61
0.56
0.42
United States
0.72
0.55
0.52
0.31
0.61
Mean
((%))
15-9
11/30/2010
Stock Market
CN
Canada (CN)
FR
GM
JP
SD
((%))
1.07
5.55
Countryy
stock
market
vs. world
1.00
1.20
6.00
1.04
1.19
6.29
1.03
0.92
6.53
1.10
1.19
5.20
0.97
1.11
4.25
0.88
UK
France (FR)
0.49
Germany
(GM)
0.46
Japan (JP)
0.34
0.40
0.32
United
Kingdom
0.59
0.61
0.56
0.42
United States
0.72
0.55
0.52
0.31
0.61
Mean
((%))
15-10
Efficient frontier
SD
1.5%
OIP
Monthly Return
NL
US
1.0%
0.5%
0.0%
0.0%
UK
SW
CN
HK
IT
GM
JP
Rf
Monthly Standard Deviation
1.0% 2.0% 3.0% 4.0%
10%
15-11
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4.82%
8.76%
Italy
6.60%
Netherlands
31.11%
Sweden
28 01%
28.01%
U.S.
20.70%
Total
100.00%
15-12
15-13
11/30/2010
ODP
Mean
Return
1.40%
1.11%
Standard
Deviation
4.74%
4.25%
return
Gains from
International Diversification
OIP
1.40%
1.11%
ODP
4.74%
4.25%
risk
15-14
Effects of Changes
in the Exchange Rate
15-15
11/30/2010
Effects of Changes
in the Exchange Rate
Where
Ri is the local currency return in the ith market
ei is the rate of change in the exchange rate between
the local currency and the dollar
15-16
Effects of Changes
in the Exchange Rate
15-17
11/30/2010
Effects of Changes
in the Exchange Rate
Effects of Changes
in the Exchange Rate
Var(Ri$) = Var(Ri) + Var(ei) + 2Cov(Ri,ei) + Var
This equation demonstrates that exchange rate
fluctuations contribute to the risk of foreign
investment through three channels:
1. Its own volatility, Var(ei).
2. Its covariance
i
with
i h the
h local
l l market
k returns
Cov(Ri,ei).
3. The contribution of the cross-product term, Var.
15-19
10
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International Portfolio:
Risk Decomposition
15-20
15-21
11
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1.
2.
3.
15-22
Standard
Deviation
US
R2
5.78%
0.69
0.39
S&P 500
14.04%
4.25%
1.00
1.00
U.S. MNC
Index
16.08%
4.38
.98
.90
U.S. Based
International
Mutual Funds
15-23
12
11/30/2010
Standard
Deviation
US
R2
U S Based
U.S.
International
Mutual Funds
18.96%
5.78%
0.69
0.39
S&P 500
14.04%
4.25%
1.00
1.00
16.08%
4.38
.98
.90
15-24
15-25
13
11/30/2010
RF = + US RUS + HM RHM +
15-26
15-27
14
11/30/2010
15-28
15-29
15
11/30/2010
15-30
15-31
16
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15-32
15-33
17
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15-34
For example, J.P. Morgan provides access to the Jayhawk China Fund,
a hedge fund investing in Chinese stocks not readily available in U.S.
markets.
15-35
18
11/30/2010
Hedge
H
d ffunds
d may make
k wrong bbets
t bbased
d on th
the incorrect
i
t
prediction of future events and wrong models.
The failure of Long Term Capital Management provides an
example of the risk associated with hedge fund investing.
15-36
15-37
19
11/30/2010
Proportion of Domestic
E iti in
Equities
i Portfolio
P tf li
France
2.6%
64.4%
Germany
3.2%
75.4%
Italy
1.9%
91.0%
Japan
43.7%
86.7%
Spain
p
1.1%
94.2%
Sweden
0.8%
100.0%
United Kingdom
10.3%
78.5%
36.4%
98.0%
United States
Total
100.0%
15-38
15-39
20
11/30/2010
15-40
21
1/1/2010
Div /Coupon
BP 78.75
BP 95.67
BP 1.50
BP 950
BP 920
BP 95.00
$ 1.75
$ 1.60
22.50%
8.25%
17.00%
0.31
0.52
a) Calculate the percentage return over the 2009-2010 period, in US dollar terms, for:
(i) British Air stocks
b) Calculate the standard deviation of returns over the 2009-2010 period, in US dollar terms for:
(i) British Air stocks
30 %
10 %
Standard deviation of returns (in $) on Samsung stock during the 2009-2010 period:
25 %
Standard deviation returns (in $) on Mexico Air stocks during the 2009-2010 period:
12 %
Correlation coefficient between the returns on the Samsung and Mexico Air stocks
0.25
Calculate the percentage return and the standard deviation of returns over the 2009-2010 period, in US
dollar terms for a portfolio which consisted of 60% Samsung and 40% in Mexico Air stocks:
1/1/10
Div/Shr
Kr 55.00
Kr 45.00
Kr 2.5
MP 880
MP 1130
MP 18.0
$ 0.075
$ 0.1005
$ 0.1055
$ 0.1050
12.50%
18.25%
17.00%
29.00%
0.28
0.35
0.03
a) Calculate the percentage return and the standard deviation of returns over the 2009-2010 period, in
US dollar terms, for:
(i) Ericsson (ER) stocks:
RER$ =
ER$2 =
ER$ =
(ii) Mexico Air (MA) stocks:
RMA$ =
MA$2 =
MA$ =
b) Calculate the percentage return and the standard deviation of returns over the 2009-2010 period, in
US dollar terms for a portfolio which consisted of 25% ER and 75% in MA stocks:
RP$ =
P$2 =
P$ =
1/1/2010
Div/Shr
JY 1575
JY 1740
JY 180
MP 875
MP 1030
MP 25
$ 0.0075
$ 0.0078
$ 0.1000
$ 0.0900
15 %
20 %
5%
10 %
0.75
0.25
0.10
a) Calculate the percentage return and the standard deviation of returns over the 2009-2010 period, in
US dollar terms, for:
(i) Matusita (MT) stocks
RMT$ =
MT$2 =
MT$ =
(ii) Mexico Air stocks
RMA$ =
MA$2 =
MA$ =
b) Calculate the percentage return and the standard deviation of returns over the 2009-2010 period, in
US dollar terms for a portfolio which consisted of 60% Matusita and 40% in Mexico Air stocks:
RP$ =
P$2 =
P$ =
Variable Definition
P0A,P1A ,DA = Beginning price, ending price, and dividends or interests of foreign
security A (stocks or bonds) measured in foreign currency X1
P0B,P1B ,DB = Beginning price, ending price, and dividends or interests of foreign
security B (stocks or bonds) measured in foreign currency X2
SR0, SR1= Beginning and ending spot rates for foreign currency of country A or B
RSA, RSB = Return on foreign securities A and B (stocks or bonds) measured in
foreign currency
RXA ,RXB = Return on foreign currency of countries A and B measured in US dollars
R$A, R$B = Dollar return on foreign securities A and B (stocks or bonds)
SASB = Standard deviation of return on foreign security A and B measured in
foreign currency
XA XB = Standard deviation of return on foreign currency countries A and B
measured in US dollars
$A$B = Standard deviation of dollar return on foreign securities A and B
SA,XA
SA XA = Correlation coefficient of returns on foreign security A measured in foreign
currency and the dollar return on foreign currency of country A
SB,XB = Correlation coefficient of returns on foreign security B measured in foreign
currency and the dollar return on foreign currency of country B
A,B = Correlation coefficient of returns on foreign security A and returns on foreign
security B
R$P = Dollar return on a portfolio containing securities A & B
$P = Standard deviation of dollar return on a portfolio containing securities A & B
WA, WB = Proportion of funds invested in security A and security B
$B = [
[ SB2 + XB2 + 2*
2* SB*
* XB*
* SB,XB ]1/2 : Standard deviation of dollar return on
security B
R$P = WA* R$A + WB * R$B : Dollar return on the portfolio containing securities A & B