Assessing Risks with International Diversification
I believe that all investors hope to get a higher than expected return on their investment at a minimum downside risk. Investing in global markets has begun to make sense for an increasing number of investors as U.S. equities only make up less than 40 percent of world equities and an even small fraction of the total world wealth (Bodie, Kane &Marcus, 2014).By 2011, more than 50 countries had an aggregated market capitalization of $1 billion and above, making investing in foreign capital markets much more easier than ever before (Bodie et al, 2014).
Financial Exchange Risk
I believe that investing in a foreign country might be risky for an investor from U.S. because the other country obviously uses a different currency other than the U.S. dollar, therefore any movement of the exchange rate between the U.S. dollar and the foreign currency, will be a cause for concern for the U.S. investor. Consider a U.S. investor who wants to invest in British government bills, which are paying 10% annual interest in British pounds (Bodie et al., 2014).While the U.K. bills are risk-free for a British investor, it is not the case for a U.S. investor because of the foreign exchange risk (Bodie et al., 2014).Suppose that, at the time of investment the exchange rate is $1.8 per pound, an initial investment of $20,000 can be exchange for £11111.11 and would grow to £12,222.22 in one year (Bodie et al., 2014).Supposing that at the end of the year the British pound has depreciated against the dollar and the exchange rate is now $1.60 per pound (Bodie et al., 2014).The £12,222.22 can be exchanged back to U.S. dollars for $19555.55(=1.6*12222.22), which is a loss of $444.45(Bodie et al., 2014).Therefore d...
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The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
If you have formed a conclusion from the facts and if you know your judgment is sound, act on it- even though others may hesitate or differ”. The investor is not wrong if the crowd disagrees, and the other way around. It is also I important for the investor in both Enterprising and Defensive Investor to diversify with the amount of different Stocks and bonds.
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
Dimensional's value strategies are based on the Fama/French research in multifactor portfolios designed to capture the return premiums associated with high book-to-market (BtM) ratios.
If the world, consisting of the consciences of over six billion people, wants the market to grow, then the market will grow. With international interest and knowledge, we can eliminate fraud and stock pooling to raise stock prices. The markets will be more honest, and they will grow at a rate that we need them to, in order to continue with our exceptional economic growth rate.
Some investors are wary about the process of investing internationally, carrying the concept that it is always to precarious and complex. While there are risks involved with international investing, there are also very beneficial and profitable reasons for doing so. Ev...
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
Investor psychology and security market under- and overreactions, Journal of Finance, 53, No. 1. 6, pp. 58-78. 1839 - 1885 - 1885. i.e. a. Burton G. Malkiel, 2003. The Efficient Market Hypothesis and Its Critics, Journal of Economic Perspectives, Vol.
The following essay will expand on the usefulness and flaws of CAPM and other asset evaluation frameworks and in the end showing that despite all the evidence against CAPM it is still a useful model for determining asset investments.
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
believe that the USD will depreciate against EUR and think that it can bear the risk of appreciation
Introduction This paper will provide an argument for diversification to be presented to the board of directors for Starbucks. A strategy for diversification indicating the products and industries for diversification and how synergies may be gained. The identification and the discussion of the foreign market Starbucks should enter will be presented, along with the strategy it should use to enter the market. Challenges Starbucks may face in the foreign market will be discussed, as well as how it might respond strategically to minimize the impact of these challenges. Also, this paper will encompass a scenario when it would not make sense for Starbucks to diversify or expand into a foreign market, and how the company will create a business environment conducive to ethical behavior will be assessed.
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.