Globalization of financial markets, Financial Management

Floria Scarpia believes that many of her clients could benefits from using international investments to diversify their portfolios but many are reluctant to invest abroad -especially since they many be unfamiliar all suggestions to diversify internationally have met resistance. At best, clients have been willing to invest in U.S firms with international operations such as Coca-Cola or IBM

To overcome this reluctance Scarpia has decided to demonstrate the reduction in portfolio risk from foreign investments. For the demonstration she has selected a single country fund to illustrate the variability of returns from combining a country fund with an index fund based on the S&P 500 stock index. The S&P 500 has averaged a return of 10 percent with a standard deviation of 10 percent. The country fund specializes in Japanese stocks and has a beta of 1.0 when compared to the return on the Japanese market. The return has average 10 percent with standard deviation of 14 percent. The fund has no investments in U.S stocks and historically the correlation coefficients rating the returns on the  fund  to the S&P 500 stock index have been 0.4.to isolate the impact of selecting the fund for diversification , Scarpia assumes that the return on the fund and on the S&P 500 stock index will continue to be 10percent so that the investor can anticipate earning 10 percent regardless of which choice is made. the only consideration will be the reduction in the variability of the returns. ( i.e., the reduction in risk as measured by the standard deviation).to show the reduction , compute the standard deviation of the return when combining the U.S index fund with the Japanese fund for each of the following investment proportions:

Proportion invested in the U.S fund                                 proportion in the foreign fund

100%                                                                                                   0%

90                                                                                                       10

80                                                                                                       20

70                                                                                                       30

60                                                                                                        40

50                                                                                                       50

40                                                                                                       60

30                                                                                                       70

20                                                                                                      80

10                                                                                                      90

0                                                                                                       100

1) What happens to the portfolio standard deviations as the investor substitutes the foreign securities for the U.S securities? What combination of U.S and Japanese stock minimizes risk?

2) Repeat the analysis but assume that the correlation coefficient is -0.2 instead of 0.4

3) Should a Japanese investor who owns only Japanese stock acquire U.S stocks?

4) How would each of the following affect a U.S investor's willingness to acquire foreign stocks?

a) The dollar is expected to strengthen

b) Globalization of financial markets should accelerate.

Posted Date: 3/1/2013 2:50:06 AM | Location : United States







Related Discussions:- Globalization of financial markets, Assignment Help, Ask Question on Globalization of financial markets, Get Answer, Expert's Help, Globalization of financial markets Discussions

Write discussion on Globalization of financial markets
Your posts are moderated
Related Questions
Q. What is Estate Tax? Estate Tax - Tax on the value of a DECENDENT'S taxable estate, usually defined as the decedent's ASSETS less LIABILITIES and certain expenses that may in

Q. Describe about Profitability Index? Profitability Index OR (PI):- Second method of estimate a project through discounted cash flows is profitability index method. This metho

Use the excel spreadsheet to project the net income for Winnebago from assumptions about key revenue & expense items.   Use the following assumptions to evaluate the projected net

What is the time value of money? The time value of money signifies that money you hold in your hand today is worth more than money you expect to receive in the future. Likewise

Briefly discuss the three approaches to the short-term financing problem and provide relevant examples of each?

Q. Briefly explain What is TREM Card? 1. As per National and international regulations, the drivers of vehicles carrying hazardous goods should have the documentation outlining

Flowcharts - Documenting the accounting system Depict in outline the sequence of events in a system showing document flow and department or function responsible for every ev

Q. Explain about Modern Approach of financial management? The modern approach considers the term financial management in a broad sense. According to this approach the finance f

explain the assumptions underlying Walter''s dividend model?

Explain Hard capital rationing and Soft capital rationing The NPV decision rule to admit all projects with a positive net present value requires the existence of a perfect cap