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The benefits of international portfolio investment - Essay Example
The need for international portfolio investment has risen because there is a need to reduce the level of risk. By diversifying the portfolio, the risk can be reduced significantly. International portfolio investment is a term used to define investment done in different economies worldwide…
There are numerous benefits of internationalizing the portfolio. By internationalizing, the individual or firm will be able to minimize the risk; invest in growing markets thus benefiting from their growth; hedge the prices of goods in the consumption basket; enjoy higher return than expected; diversify investments; and enjoy lower variation of return. High economic growth leads to the higher GDP and high growth level. This attract other investors from other countries in invest in the growing economies. Growing economies are determined by the World Bank as the ones which have average income levels but high economic growth levels. These emerging economies can be of Middle East, Asia, Africa or Latin America. The growth levels attract the foreign investment which further improves their economy. These economies including some of the developed ones such as Japan and Netherlands provide tremendous opportunities to foreign investors. The financial investment in these countries enable individuals and firm to increase their investment by two fold within a couple of years. Hence, it is seen as a good opportunity by investors.
However, the small economies are still riskier compared to developed economies. In small economies, the prices might fluctuate rapidly and in case of liquefying the investment, losses might have to be borne. Also, the emerging economies might not be too stable politically. Thus, there is a political risk involved such as instability of political system, change of policies regarding foreign investment and remittances, change in foreign exchange policy and change of property rights. These factors make the investment in emerging markets riskier compared to developed economies where there is political stability.