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Chapter 11 International Investing

Chapter 11 International Investing. Benefits Of International Investing. Portfolio Risk Reduction Enhancement of Portfolio Expected Return Essentially Riskless Investment Opportunities. 1996 World Stock Markets. Risk Reduction With International Diversification. % Risk. 100 80 60 40

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Chapter 11 International Investing

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  1. Chapter 11International Investing

  2. Benefits Of International Investing • Portfolio Risk Reduction • Enhancement of Portfolio Expected Return • Essentially Riskless Investment Opportunities

  3. 1996 World Stock Markets

  4. Risk Reduction With International Diversification % Risk 100 80 60 40 20 0 U.S. Stocks International Stocks 11.7 1 10 20 30 Number of Stocks

  5. Currency Risk • Weaker $ Enhances Return • Of U.S. investors abroad • Eliminate Currency Risk • Hedging • Forward transactions

  6. Foreign Exchange Major Influence on the Performance of U.S. Investments Abroad

  7. Efficient Frontier Points Of View For German Investors American Investors Japanese Investors Minimum Variance Portfolio

  8. International Parity Relationships • Purchasing Power Parity (PPP) • International Fisher Relationship (IFR) • Foreign Exchange Expectations (FEE) • Interest Rate Parity (IRP)

  9. PPP • Relationship Between • Inflation • Foreign exchange rates • Estimated Exchange Rates Based • On expected inflation rates • Factors to Consider • Trade cost and barriers • Requires knowing the future inflation differential

  10. IFR • Links Nominal Interest Rates and Inflation Rates in Different Countries • Uses the Expected Inflation Rates to Estimate Exchange Rates

  11. FEE • Identifies the Relationship Between • Current forward exchange rate • Expected foreign exchange rate

  12. IRP • Links Changes in Forward Foreign Exchange Rates and Nominal Interest Rates • No arbitrage

  13. Spot Exchange PPP FEE Linear Relationship Inflation Forward Exchange IFR IRP Interest Rates

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