Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons Power Points by Joseph...
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Transcript of Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons Power Points by Joseph...
Multinational Financial Management Alan Shapiro
9th Edition J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
THE BENEFITS OF INTERNATIONALEQUITY INVESTING
I. THE BENEFITS OF INTERNATIONAL
EQUITY INVESTINGA. Advantages
1. Offers more opportunities than
a purely domestic portfolio
2. Attractive investments overseas
3. Impact on efficient portfolio with diversification benefits
Basic Portfolio Theory
II. Basic Portfolio TheoryA. What is the efficient frontier?
It represents the most efficient combinations of all possible risky assets
Basic Portfolio Theory
The broader the diversification, the more stable the returns and the more diffuse the risk.
Basic Portfolio Theory
C. Total Risk 1. A Security’s Returns may be segmented into
Systematic Risk
can not be eliminated
Non-systematic Risk
can be eliminated by diversification
INTERNATIONAL DIVERSIFICATION
2. International diversification and systematic risk
a. Diversify across nations withdifferent economic cycles
b. While there is systematic riskwithin a nation, outside the country
it may be nonsystematic and diversifiable
INTERNATIONAL PORTFOLIO INVESTMENT
3. Recent Historya. National stock markets have wide
differences in returns and risk.
b. Emerging markets have higher
risk and return than developed
markets.
c. Cross-market correlations have
been relatively low.
INTERNATIONAL PORTFOLIO INVESTMENT
4. Theoretical Conclusion:
International diversification pushes out the efficient frontier.
CROSS-MARKET CORRELATIONS
5. Cross-market correlationsa. Recent markets seem to be most correlated when volatility is greatest
b. Result:
Efficient frontier retreats
Investing in Emerging Markets
D. Investing in Emerging Markets
1. Offers highest risk and returns
2. Low correlations with returns
elsewhere
3. As impediments to capital market mobility fall, correlations are likely to
increase in the future
Barriers to International Diversification
E. Barriers to International Diversification1. Segmented markets2. Lack of liquidity3. Exchange rate controls4. Underdeveloped capital markets5. Exchange rate risk6. Lack of information
a. not readily accessibleb. data is not comparable
Other Methods to Diversify
F. Diversify by 1. Trade in American Depository
Receipts (ADRs)2. Trade in American shares3. Trade internationally diversified
mutual funds:a. Global (all types)b. International (no home-country securities)c. Single-country
INTERNATIONAL PORTFOLIO INVESTMENT
4. Calculation of Expected Portfolio Return:
rp = a rUS + ( 1 - a) rrw
where
rp = portfolio expected return
rUS = expected U.S. market return
rrw = expected global return
Expected Portfolio Return
Sample ProblemWhat is the expected return of a portfolio with 35% invested in Japan returning 10% and 65% in the U.S. returning 5%?
rp = a rUS + ( 1 - a) rrw
= .65(.05) + .35(.10) = .0325 + .0350= 6.75%
Expected Portfolio Return
Calculation of Expected Portfolio Risk
where = the cross-market correlation
US2 = U.S. returns variance
r w2 = World returns variance
1/ 22 2 2 2(1 ) 2 (1 )P US rw US rwa a a a
Portfolio Risk Example
What is the risk of a portfolio with 35% invested in Japan with a standard deviation of 6% and a standard deviation of 8% in the U.S. and a correlation coefficient of .7?
= [(.65)2 (.08) 2 + (.35) 2(.06) 2 + 2(.65)(.35)(.08)(.06)(.7)]1/2
= 6.8%
1/ 22 2 2 2(1 ) 2 (1 )P US rw US rwa a a a
INTERNATIONAL PORTFOLIO INVESTMENT
III. MEASURING TOTAL RETURNS FROM FOREIGN PORTFOLIOSA. To compute dollar return of a foreign security:
or1 0
$0
( )( )US ForeignCurrency
e eR R
e
0 1$
1
( )( )US ForeignCurrency
e eR R
e
INTERNATIONAL PORTFOLIO INVESTMENT
Bond (calculating return) formula:
where R$ = dollar return B(1) = foreign currency bond price at time 1 (present)
C = coupon income during periodg = currency depreciation or appreciation
$
(1) (0)1 1 (1 )
(0)
B B CR g
B
INTERNATIONAL PORTFOLIO INVESTMENT
B. Calculating U.S. $ Return Equity Formula:
where R$ = dollar returnP(1) = foreign currency stock price at time 1D = foreign currency annual
dividend
$
(1) (0)1 1 (1 )
(0)
P P DR g
P
U.S. $ Stock Returns:Sample Problem
Suppose the beginning stock price if FF50 and the ending price is FF48. Dividend income was FF1. The franc depreciates from FF 20 /$ to FF21.05 /$ during the year against the dollar.
What is the stock’s US$ return for the year?