Investments Chapter 19
Essay Preview: Investments Chapter 19
Report this essay
Investments Chapter 19 homework
11) Including international equities as an additional asset for a pension fund:
Investing part of the pension fund in international equities can increase expected return and will create a more active portfolio as well as help diversify risk among different currencies.
Pros:
Higher growth, unique–diversificationless risk, business cycles, foreign exchange, different interest rates
The correlation coefficients between a stock index of one country and bond portfolios of another are very low–a portfolio balanced between stocks and bonds would greatly benefit from international diversification.
International diversification can reduce the standard deviation of a domestic portfolio by almost 50%.
Investing in emerging markets results in higher average returns, so a portfolio balanced between emerging markets and developed countries may be a way to lessen risk but also maintain a higher return.
Investing in international equities increases the risk of the portfolio.
Barriers:
Regulations–institutional, political barriers, costs, imperfect information, language
Exchange rate risk–changes in exchange rates with a particular country can result in a negative return for an investment in that country.
Imperfect exchange rate risk hedging–the hedging opportunity offered by foreign exchange forward contracts are imperfect because you do not know the risky return earned in the foreign currency.
Country-specific risk–financial markets of some countries are less transparent that others and false or misleading information is also a problem. The stability of the country sometimes determines the nature of the investment–political, economic, and financial risks can be associated with unstable countries.
The fixed-income asset categories historically