投资学-Chap25new.pptVIP

Chapter 25 International Diversification Background Global market US Market is 40% - 49% of all markets Improved access technology New instruments Emphasis for our investigation Risk assessment Diversification 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? Foreign Exchange Risk 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 It’s not possible to completely hedge a foreign investment. Returns with Foreign Exchange Return in US is a function of two factors: 1. Return in the foreign market 2. Return on the foreign exchange Returns with Foreign Exchange: Example Condition: U.S. Investor invests $10,000 in the British Market Initial Conditions: Initial Investment : $20,000 Initial Exchange: $2.00/ Pound Sterling Initial Investment in Pound Sterling: 10,000 Risk Free Rate in U.K.: 10% Future Value in Pound Sterling: 11,000 Returns with Foreign Exchange Pound Depreciates to $1.80 11,000 * 1.8 $19,800 Return in US$ -200 / 20,000 -1% Pound Remains at $2.00 11,000 * 2.0 $22,000 Return in US$ 2,000 / 20,000 10% Pound Appreciates to $2.20 11,000 * 2.20 $24,200 Return in US$ 4,200 / 20,000 21% Returns with Foreign Exchange Movements in foreign exchange can have a major influence From Figure 25.2 New Zealand nearly 50% of return is from foreign exchange Australia virtually all of the return in from foreign exchange Returns from U.K. and Switzerland are mostly from returns in local currency Both factors must be considered in international investing Country Specific Risk Political Risk Services Group Ratings Rank countries with respect to political risk, financial risk and economic risk Assign composite rating from very high risk to very low risk based on the above