International Portfolio Diversification
Running head: INTERNATIONAL PORTFOLIO DIVERSIFICATION
International Portfolio Diversification
International Portfolio Diversification Globalization resulted, among other things, in a noticeable increase in foreign trade and investment worldwide. For individuals, the main type foreign investment is foreign portfolio investment (or foreign indirect investment) which is “the investment by individuals, firms, or public bodies (e.g., governments or nonprofit organizations) in foreign financial instruments such as government bonds, corporate bonds, mutual funds, and foreign stocks” (Shenkar & Luo, 2004, p. 53). Nevertheless, portfolio investment does not necessarily have to be in foreign financial instruments, it can also be in local financial instruments or in a mix of both local and foreign equities. Evidently, investing in purely local or foreign portfolios has its advantages and disadvantages, but diversification of the portfolio to include both local and foreign equities is said to have more advantages than disadvantages. Accordingly, this paper will focus on illustrating some of the benefits of international portfolio diversification, in addition to illustrating how three different global funds have been able to use the concept of international portfolio diversification to successfully invest.
The Benefits of International Diversification One of the main benefits of international investing is that it offers far more opportunities than investing the in the local market only. More specifically, international portfolio diversification offers the advantage of achieving a better risk-return trade-off than by investing solely in U.S. or local securities (Shapiro, 2005, p. 411). This means that expanding the universe of assets available for investment should lead to higher returns for the same level of risk or less risk for the same level of expected return (Shapiro, 2005, p. 411). In other words, “The broader the diversification, the more stable the returns
International Portfolio Diversification
International Portfolio Diversification Globalization resulted, among other things, in a noticeable increase in foreign trade and investment worldwide. For individuals, the main type foreign investment is foreign portfolio investment (or foreign indirect investment) which is “the investment by individuals, firms, or public bodies (e.g., governments or nonprofit organizations) in foreign financial instruments such as government bonds, corporate bonds, mutual funds, and foreign stocks” (Shenkar & Luo, 2004, p. 53). Nevertheless, portfolio investment does not necessarily have to be in foreign financial instruments, it can also be in local financial instruments or in a mix of both local and foreign equities. Evidently, investing in purely local or foreign portfolios has its advantages and disadvantages, but diversification of the portfolio to include both local and foreign equities is said to have more advantages than disadvantages. Accordingly, this paper will focus on illustrating some of the benefits of international portfolio diversification, in addition to illustrating how three different global funds have been able to use the concept of international portfolio diversification to successfully invest.
The Benefits of International Diversification One of the main benefits of international investing is that it offers far more opportunities than investing the in the local market only. More specifically, international portfolio diversification offers the advantage of achieving a better risk-return trade-off than by investing solely in U.S. or local securities (Shapiro, 2005, p. 411). This means that expanding the universe of assets available for investment should lead to higher returns for the same level of risk or less risk for the same level of expected return (Shapiro, 2005, p. 411). In other words, “The broader the diversification, the more stable the returns
References: MSN.com (2006). 3 Global Funds for Uncertain Times. Retrieved July 10th, 2008 from http://articles.moneycentral.msn.com/Investing/Morningstar/3GlobalFundsForUncertainTimes.aspx MSN.com (2008). American Funds Capital World G/I A (CWGIX). Retrieved July 10th, 2008 from http://moneycentral.msn.com/detail/stock_quote?Symbol=CWGIX MSN.com (2008). Mutual Discovery Z (MDISX). Retrieved July 10th, 2008 from http://moneycentral.msn.com/detail/stock_quote?Symbol=MDISX MSN.com (2008). Templeton Growth A (TEPLX). Retrieved July 10th, 2008 from http://moneycentral.msn.com/detail/stock_quote?Symbol=TEPLX Shapiro, A., C. (2005). Foundations of Multinational Financial Management (5th ed.). [University of Phoenix Custom edition e-text]. Hoboken, NJ: John Wiley & Sons. Retrieved July 10th, 2008 from University of Phoenix, Resource, FIN403 – Global Finance Web site: https://ecampus.phoenix.edu/secure/resource/resource.asp Shenkar, O., & Luo, Y. (2004). International Business. [University of Phoenix Custom edition e-text]. Hoboken, NJ: John Wiley & Sons. Retrieved July 10th, 2008 from University of Phoenix, Resource, GBM480 – Global Business Environment and Strategy Web site: https://ecampus.phoenix.edu/secure/resource/resource.asp