Lecture 8: International Portfolio Management

Question 1

What is the implication in investing internationally on an investors portfolio?

Answer 1

There are more assets to choose from on a global scale, therefore a better risk-return tradeoff is better.

Question 2

What objectives can international investment achieve?

Answer 2

1. Reduce the risk (SD) for a give level of expected return.
2. Provide an improved hedge against unanticipated changes in consumption opportunnities.

Question 3

What are the risks associated with international porfolio investment?

Answer 3

1. Correlations rise when markets are volatile (especially in downturns).
2. Manny foreign stock markets have low lliquidity (emerging markets especially).
3. Unnfamiliar political, economic and social factors hinder decision making.
4. Differing market practices can lead to errors
5. Information barriers; including distance, language and lack of personal networks.
6. Reliance on foreign legal remedies.
7. Unequal treatment of foreign investors vs. local investors.

Question 4

Should internationl investment (portfolios) be hedged?

Answer 4

It is a contraversial area, it is recomended by some but not by others.

Question 5

What are the arguement for hedging currency risk?

Answer 5

1. Correlations are reasonably forecastable (stable).
2. Transaction costs of hedging are low.
3. Invest in a broader class of assets, not speculate on currency movements.
4. Evidence confirms that hedging produces a better risk-return tradeoff.

Question 6

What are the arguements against hedging currency risk?

Answer 6

1. Correlations are not reasonably stable (judgement call).
2. Transaction costs are low but nnot zero (other costs associated with hedging; higher reporting costs, higher audit costs, more salaries to pay).
3. Currencies can be considered as another asset (connsumption hedging may also be important).