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International Portfolio Investment

International Portfolio Investment. Chapter Twenty Two Eiteman, Stonehill, & Moffett. Relevant statistics for a return distributions for a single asset. Expected return use the mean of historical returns to estimate Standard deviation

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International Portfolio Investment

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  1. International PortfolioInvestment Chapter Twenty Two Eiteman, Stonehill, & Moffett Chapter 15 - Portfolio Investment

  2. Relevant statistics for a return distributions for a single asset • Expected return • use the mean of historical returns to estimate • Standard deviation • use the standard deviation from historical returns to estimate • Covariance • use covariance with other return distributions to estimate correlation and asset betas Chapter 15 - Portfolio Investment

  3. Statistics. Chapter 15 - Portfolio Investment

  4. Correlation • Correlation normalizes covariance • value of +1 means perfect positive correlation • value of 0 means independence • value of -1 means perfect negative correlation Chapter 15 - Portfolio Investment

  5. Relevant statistics for a portfolio of many assets - Chapter 15 - Portfolio Investment

  6. Portfolio Risk Chapter 15 - Portfolio Investment

  7. Two-asset Portfolio Preferred Portfolio Ep Efficient Set Opportunity Set Risk preferences SDP Chapter 15 - Portfolio Investment

  8. Implications of Correlation Statistics • The lower the pairwise correlation of two assets, the greater the diversification benefit of adding those assets to your portfolio • Adding assets which have low pairwise correlation with each other to your portfolio reduces overall portfolio risk Chapter 15 - Portfolio Investment

  9. Affects of Correlation Ep High positive Correlation Low positive Correlation SDP Chapter 15 - Portfolio Investment

  10. Assets with high positive correlation r T Chapter 15 - Portfolio Investment

  11. Assets with low positive correlation r T Chapter 15 - Portfolio Investment

  12. Four-asset Portfolio Portfolios with assets A , B, C & D Ep Portfolios with assets C & D Portfolios with assets A & B SDP Chapter 15 - Portfolio Investment

  13. Calculating Portfolio values - four asset portfolio Chapter 15 - Portfolio Investment

  14. Multiple-asset portfolios - calculating portfolio values Chapter 15 - Portfolio Investment

  15. Multiple-asset Portfolio Ep SDP Chapter 15 - Portfolio Investment

  16. Systematic Risk SDp All Canadian equity portfolio SDC SDW International Portfolio N Chapter 15 - Portfolio Investment

  17. International Diversification World Equities Efficient Frontier Ep Canadian Equities Efficient Frontier SDP Chapter 15 - Portfolio Investment

  18. Systematic Risk • As you diversify your portfolio by adding assets, your portfolio standard deviation decreases • When you are fully diversified, your risk is the risk of the market portfolio • By changing portfolio proportions you can modify risk to suit your preferences Chapter 15 - Portfolio Investment

  19. Optimal Portfolio U2 U1 Capital Market Line Less risk averse EM More risk averse SDM Chapter 15 - Portfolio Investment

  20. Relevant statistic for a fully diversified portfolio - Beta • Beta measures only the systematic risk of an assets • Beta is also a covariance that is normalized by something, the variance of the market Chapter 15 - Portfolio Investment

  21. The Risk-free Asset • The risk-free asset does not exist except as a theoretical concept • The least risky asset is the T-bill • Low default risk - government backing • Low interest rate risk - very short-term security Chapter 15 - Portfolio Investment

  22. Capital Asset Pricing Model • Prices the risk of asset relative to its systematic risk • gives the required rate of return relative to its systematic risk Chapter 15 - Portfolio Investment

  23. Security Market Line rM =1 Chapter 15 - Portfolio Investment

  24. Security Market Line - Change in rate of inflation rM rM Inflation adjustment =1 Chapter 15 - Portfolio Investment

  25. Security Market Line -Change in Risk Premium rM rM Slope change reflecting increased Systematic Risk =1 Chapter 15 - Portfolio Investment

  26. Country Markets • Are the efficient • perfect information • few market reporting requirements • price takers • few buyers, few sellers • no transactions costs • capital controls • foreign content rules Chapter 15 - Portfolio Investment

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