International Diversification推荐.docxVIP

Chapter25: International DiversificationChapter OpenerPART??VIIp. 863ALTHOUGH WE IN the United States customarily use a broad index of U.S. equities as the market-index portfolio, the practice is increasingly inappropriate. U.S. equities represent less than 40% of world equities and a far smaller fraction of total world wealth. In this chapter, we look beyond domestic markets to survey issues of international and extended diversification. In one sense, international investing may be viewed as no more than a straightforward generalization of our earlier treatment of portfolio selection with a larger menu of assets from which to construct a portfolio. Similar issues of diversification, security analysis, security selection, and asset allocation face the investor. On the other hand, international investments pose some problems not encountered in domestic markets. Among these are the presence of exchange rate risk, restrictions on capital flows across national boundaries, an added dimension of political risk and country-specific regulations, and differing accounting practices in different countries. Therefore, in this chapter we review the major topics covered in the rest of the book, emphasizing their international aspects. We start with the central concept of portfolio theory—diversification. We will see that global diversification offers opportunities for improving portfolio risk–return trade-offs. We also will see how exchange rate fluctuations and political risk affect the risk of international investments. We next turn to passive and active investment styles in the international context. We will consider some of the special problems involved in the interpretation of passive index portfolios, and we will show how active asset allocation can be generalized to incorporate country and currency choices in addition to traditional domestic asset class choices. Finally, we demonstrate performance attribution for international investments.25.1 Global Markets for Equitiesp.