Capstone Assignment IBE Finance Topic 3
International investments: How to manage portfolios in a global financial market?: The case for a global investment strategy is quite convincing: Rather than limiting oneself to stocks, bonds or other securities traded in the domestic financial market, investors can increase their investment opportunity set by also considering securities traded in foreign markets. These securities might have risk and return characteristics that are unavailable in the domestic market or they might simply be less correlated with domestic securities. In the sense of Markowitz’ portfolio theory, by going international an investor can shift the efficient frontier upwards and to the left and in this way invest in portfolios with higher return but the same risk or in portfolios with the same return but lower risk.
However, many questions concerning international investments remain open: Should investors invest globally? What would happen if all investors diversified their portfolios internationally, e.g. what asset prices would result from such a market equilibrium? What type of risks would be priced in the marketplace, in particular would taking currency risk be rewarded? Do investors actually invest globally? Are there special diversification opportunities for international investors – for example from investing in not fully efficient, emerging financial markets or in foreign markets that are segmented from the home market?
Answer these questions from a conceptual point of view based on portfolio theory but also consider empirical evidence about the global financial markets.
You may make use of the textbook from the course International Financial Management for theoretical reference:
- Butler, K.C., Multinational Finance, 5th/6th edition, Wiley, Chapter 18-20, part V “International Portfolio Investment and Asset Pricing", available in UB’s study landscape.
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In addition to the literature listed below, make sure that you review at least 5 additional articles of your own choice. For these, please provide correct references.
- Campbell, J., K. Serfaty-de Medeiros and L.M. Viceira, "Global Currency Hedging", The Journal of Finance 65(1), 2010, 87-121.
- Driessen, J. and L. Laeven, "International Portfolio Diversification Benefits: Cross-Country Evidence from a Local Perspective", Journal of Banking & Finance 31(6), 2007, 1693-1712.
- Fernandes, N., “Portfolio Disaggregation in Emerging Market Investments”, Journal of Portfolio Management 31(2), Winter 2005, 41-49. (also available via http://www.clsbe.lisboa.ucp.pt/docentes/url/nfernandes/research/p_em_aa.pdf)
- Froot, K.A., P.G O'Connell and M.S. Seasholes, "The Portfolio Flows of International Investors", Journal of Financial Economics 59, February 2001, 151-193.
- Karlsson, A. and L. Nordén, "Home Sweet Home: Home Bias and International Diversification Among Individual Investors", Journal of Banking & Finance 31(2), 2007, 317-333.
- You, L. and R.T. Daigler, “Is International Diversification Really Beneficial?”, Journal of Banking and Finance 34(1), 2010, 163-173.