1、INVESTMENTS | BODIE, KANE, MARCUS Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 25 International Diversification INVESTMENTS | BODIE, KANE, MARCUS 25-2 Background The U.S. accounts for only about a third of world stock market capitalization. Emergin
2、g markets make up about 16% of the world stock market. Of the six largest countries U.S., Japan, U.K., France, Hong Kong and Canada make up about 62% of the world stock market. The weight of the U.S. within this group of six is 54%. INVESTMENTS | BODIE, KANE, MARCUS 25-3 Background Clearly, U.S. sto
3、cks do not comprise a fully diversified equity portfolio. International investing provides greater diversification opportunities. It also carries some special risks. INVESTMENTS | BODIE, KANE, MARCUS 25-4 Figure 25.1 Per Capita GDP and Market Capitalization as Percentage of GDP INVESTMENTS | BODIE,
4、KANE, MARCUS 25-5 A developed stock market enriches the population. Home-country bias: Investors frequently overweight home- country stocks. They may even completely ignore opportunities for international diversification. Issues INVESTMENTS | BODIE, KANE, MARCUS 25-6 Foreign Exchange Risk Variation
5、in return due to changes in the exchange rate. Foreign investments may yield more or less home currency than expected. A foreign investment is simultaneously an investment in an overseas asset and in a foreign currency. Risk Factors in International Investing INVESTMENTS | BODIE, KANE, MARCUS 25-7 R
6、isk Factors in International Investing 1. Return expressed in local currency 2. Return obtained when local currency is exchanged for home currency. Two sources of variation or risk: 7 INVESTMENTS | BODIE, KANE, MARCUS 25-8 Suppose the risk-free rate in U.K. is 10% and the current exchange rate is $2
7、/1. A U.S. investor with $20,000 can buy 10,000 and invest them to obtain 11,000 in one year. If the depreciates to $1.80, the investment will yield only $19, 800, a $200 loss. The investment was not risk free to a U.S. investor! Example 25.1 Exchange Rate Risk INVESTMENTS | BODIE, KANE, MARCUS 25-9
8、 The equation shows that the return to the U.S. investor is: The pound-denominated return Multiplied by The exchange rate “return” Example 25.1 Exchange Rate Risk 1 0 1()1() f E r USr UK E INVESTMENTS | BODIE, KANE, MARCUS 25-10 Figure 25.2 Stock Market Returns in U.S. Dollars and Local Currencies f
9、or 2009 INVESTMENTS | BODIE, KANE, MARCUS 25-11 Hedging Exchange Rate Risk Futures or forward markets are used to hedge the risk. The U.S. investor can make a riskless dollar return either by investing in UK bills and hedging exchange rate risk or by investing in riskless U.S. assets. 0 0 0 0 1()1()
10、 rearranged: 1() 1() ff f f F r UKr US E r US F Er UK INVESTMENTS | BODIE, KANE, MARCUS 25-12 In principle, security analysis at the macroeconomic, industry, and firm- specific level is similar in all countries. In practice, getting good information about foreign investments can be more difficult. P
11、RS Group (Political Risk Services) assesses political risk by country. Political Risk INVESTMENTS | BODIE, KANE, MARCUS 25-13 Table 25.5 Variables used in PRSs Political Risk Score INVESTMENTS | BODIE, KANE, MARCUS 25-14 Table 25.6 Current Risk Ratings and Composite Risk Forecasts INVESTMENTS | BODI
12、E, KANE, MARCUS 25-15 Table 25.7 Composite and Political Risk Forecasts INVESTMENTS | BODIE, KANE, MARCUS 25-16 Table 25.7 Interpretation The table captures country risk through scenario analysis. Risk stability is based on the difference in the rating between the best- and worst- case scenarios. IN
13、VESTMENTS | BODIE, KANE, MARCUS 25-17 Table 25.8 Political Risk Points by Component INVESTMENTS | BODIE, KANE, MARCUS 25-18 Foreign Investment Avenues Purchase securities directly in the capital markets of other countries. American depository receipts (ADR) International mutual funds International E
14、TFs INVESTMENTS | BODIE, KANE, MARCUS 25-19 Are Investments in Emerging Markets Riskier? For the overall portfolio, standard deviation of excess returns is the appropriate measure of risk. For an asset to be added to the current portfolio, beta (covariance with U.S. portfolio) is the appropriate mea
15、sure of risk. INVESTMENTS | BODIE, KANE, MARCUS 25-20 Figure 25.3 Monthly Std Deviation of Excess Returns in Developed, Emerging Markets INVESTMENTS | BODIE, KANE, MARCUS 25-21 Figure 25.4 Index Dollar Return Beta on U.S. Stocks, 20002009 INVESTMENTS | BODIE, KANE, MARCUS 25-22 Figure 25.5 Average D
16、ollar-Denominated Excess Returns INVESTMENTS | BODIE, KANE, MARCUS 25-23 Average Country-Index Returns and Capital Asset Pricing Theory Figure 25.5 shows a clear advantage to investing in emerging markets. Results are consistent with risk ranking by standard deviation, but not with ranking by beta.
17、Beta rankings may fail because of home- country bias, which dominates international investing. INVESTMENTS | BODIE, KANE, MARCUS 25-24 Correlations between countries suggest international diversification is beneficial, especially for active investors. Globalization may have caused higher cross-count
18、ry correlations. Its possible to expand the efficient frontier some. Its possible to reduce the systematic risk level below the domestic only level. Benefits from International Diversification INVESTMENTS | BODIE, KANE, MARCUS 25-25 Figure 25.6 International Diversification INVESTMENTS | BODIE, KANE
19、, MARCUS 25-26 Figure 25.8 Efficient Frontier of Country Portfolios INVESTMENTS | BODIE, KANE, MARCUS 25-27 Are Benefits Preserved in Bear Markets? Correlations between countries may increase in a crisis. Rolls model suggests a common factor underlying the movement of stocks around the world. Predic
20、tion: Diversification only protects against country-specific events. What happened in 1987? In 2008? INVESTMENTS | BODIE, KANE, MARCUS 25-28 Figure 25.9 Regional Indexes around the Crash, October 14October 26, 1987 INVESTMENTS | BODIE, KANE, MARCUS 25-29 Figure 25.10 Beta and SD of Portfolios INVEST
21、MENTS | BODIE, KANE, MARCUS 25-30 Three Rules of Thumb To passively diversify your portfolio, include country indexes in order of: 1.Market capitalization (from high to low) 2.Beta against the U.S. (from low to high) 3.Country index standard deviation (from high to low) INVESTMENTS | BODIE, KANE, MA
22、RCUS 25-31 Figure 25.11 Risks and rewards of international portfolios, 20002009 INVESTMENTS | BODIE, KANE, MARCUS 25-32 Performance Attribution The EAFE index is a commonly used benchmark for portfolio performance. Measure the contribution of: 1.Currency selection 2.Country selection 3.Stock selection 4.Cash/bond selection INVESTMENTS | BODIE, KANE, MARCUS 25-33 Table 25.15 Example of Performance Attribution: International
