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ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL PORTFOLIO (IPD)
The paper sets out to examine the theory of Portfolio diversification, in which I concertrate on its application in the international scale by anlayzing the co-movements of international stock market and see how international portfolio diversification can be applied to bring out the best result for investors. It also deals with the question of optimal strategy when investing in international diversified potfolios. Two special eceonomic circumstances are investigated to find out how internatiuonal diversification strategy can minismise the loss of invetors. A conclusion is made on the best strategy and recommendations that can be adopted. The paper has total of eight sections.
|language || ||english
|wordcount || ||7669 (cca 21 pages)
|contextual quality || ||N/A
|language level || ||N/A
|price || ||free
|sources || ||34
Table of contents
1: Introduction 2
2: Theory 3
I.Modern Portfolio Theory 3
II.Risk and Return 5
III. Mean and Variance 6
3: Portfolio Diversification 7
I. Systematic Risk Principle 8
II.Portfolio Diversification Strategy
a) Horizontal Diversification 10
b) Vertical Diversification 10
c) Derivation of IPD formula 13
4: Application of International PD 15
I.Expected Returns and Std Deviations 16
II. The Efficient Frontier 18
III. Optimal International Diversification Strategy 19
5: Advantages of International PD 19
6: Disadvantages of International PD 26
7: Use of IPD in some special cases 29
8: Conclusion 31
9: References 34
Preview of the essay: ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL PORTFOLIO (IPD)
This modern portfolio theory is the opposite of traditional stock picking. It is created by economists who have tried to understand business as a whole as opposed to business analysts who look at individual investments to determine what makes them unique. In this theory, investments are described in terms of their expected rates of return in the long-run and their expected volatility in the short-run. Volatility means risk and measure how much worse than average is an investment’s time likely to be. The aim for doing this is to determine at which level is an investor willing to tolerate risk and then derive the portfolio with the highest expected return at that level of risk ...
... Germans and Japanese should consider diversifying their portfolio across their markets. The emerging markets present a powerful opportunity for investment due to their low correlation with the developed markets which can really increase diversification benefits for investors from the international arena. This study concludes that portfolio risk can be effectively reduced through diversification internationally for a risk averse investor. Investment in internationally diversified portfolios also does involve risk associated with the currency. In this study I did not analyse this risk which has a fundamental influence on the portfolio returns. With the advent of Exchange Traded funds, trading in internationally diversified portfolios has been made easier than ever and we expect to see more investment in global diversified portfolios than ever before.
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Capital Markets & Exchanges