Global Investing (Ch10) Flashcards
When should you hedge equities in a global market?
when you invest in a currency that is trending downwards or you are making a large investment in emerging markets as currencies tend to trend,
How are international markets correlated with US markets? (past 5yrs, downturns and upturns?)
- highly correlated in downturns
- not so correlated in upturns
!!!! what is the traditional view on globalisation when investing in regards to countries and industries?
Traditional View: Firms domiciled in different countries are inherently different, even if firms were essentially in the same business.
!!! how has the traditional view changed with the increase in globalisation?
Hypothesis: Due to globalization, “industry” matters much more than “country.”
!!! what are the 3 main findings when investigating the increase of globalisation?
– Both country and industry matter.
– Both global and local factors matter.
– Empirical results depend on exactly how the
question is posed and the impacts are measured
!!! which view would the professor like us to discuss in the exam?
that both country and industry matter.
one will be more important than the other depending on which type of investment.
is it more important to hedge against current exposure in bonds or stocks? what are the benefits and disadvantages?
bonds.
significantly reduces risk of currency exposure
however currency-hedged bond returns are quite similar and highly correlated across markets, therefore by hedging you potentially eliminate value added from international bonds. higher return, higher risk and allows diversification if unhedged.
how does hedging international equities impact on the risk and return of these investments? why?
only slightly, therefore managers often don’t hedge.
because volatility and correlation is similar.
Which two countries are the most concentrated and the least concentrated by industry?
- most: Greece (banking) and Finland (communications)
- least: Japan and US
Which offers greater diversification benefits, investing broadly across a diversified international index or investing in a few selected foreign markets? assuming you also hold a diversified domestic US portfolio?
investing in a few selected foreign markets, due to the high correlation of a diversified international index portfolio.
In which type of economies is top down analysis useful?
in highly segmented markets with strong country specific factors, understand the country
In which type of economies is bottom up analysis useful?
in highly integrated markets with predominant industry factors, understand the industry
What are the two most important notions of industry vs country?
1) how well the industry and country describes the correlations global equity returns, guides diversitfcation
2) what is the magnitude of that correlation
what does a low correlation based on factors such are country or industry imply?
strong diversification potential
which two additional risks must be accounted for in a global portfolio?
currency risk and country specific risk
