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Finance and Accounting Essay: International Portfolio Diversification
Finance & Accounting
Pages 10 (2510 words)
Name: Course: Instructor: Date: International Portfolio Diversification Introduction Investing on the stock market can be a very risky venture. According to Yavas (2007), both the Capital Asset Pricing Model (CAPM) and the Modern Portfolio Theory (MPT) indicates that investors should hold a well diversified portfolio in order to reduce risk.
Investors believe that favourable characteristics that are related specifically to a particular firm will offset unfavourable characteristics of other firms. This is also true for industries and so it implies that a wide range of stocks spanning various industries should be held. It is expected that certain factors affecting securities on the stock market are either firm or industry specific and so in order to reduce unsystematic risk holding securities from a wide range of industries is recommended. This is also true in relation to national securities. Certain risks are country specific and so in order to reduce risk international portfolio diversification is recommended. This paper examines how International portfolio diversification can result in a reduction in portfolio risk. It looks at various elements of risk that are associated with portfolio. It looks at market returns in five countries and shows how correlation between these markets can impact negatively on portfolio risk reduction. An analysis is also carried out to determine whether of the returns on stock markets in Japan and Canada are integrated based on their trade relationships over the years. The findings from other studies are also explored to determine how they concur with the results from this research. ...
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