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1-List 3 reasons for diversifying a portfolio via international investing 2. Wha

ID: 2675229 • Letter: 1

Question

1-List 3 reasons for diversifying a portfolio via international investing

2. What is the risk factor associated with international investing that potentially can also be viewed as a benefit [and hence, a 4th reason to invest internationally -- see question #1]. IF this factor is trending favorably for your investment portfolio, briefly explain why it is a benefit

On a risk/return basis, rank order the following asset classes from lowest to highest based on the following data. (a) Small stocks: E(r) = 18.15% and standard deviation = 36.94%; (b) Large stocks: E(r) = 11.50% and standard deviation = 20.14%; (c) US Treasury bonds: E(r) = 5.45% and standard deviation = 8.06%; How would this rank order change if the return for each class [i.e., the E(r)] were each reduced by a 3% inflation factor?

Explanation / Answer

2.Change or movement in foreign exchange rate of currency. If stocks owned overseas are denominated in the currency of its country where it is headquartered, and that currency appreciates in foreign exchange value, this produces additional positive returns [above and beyond the gain in the nominal stock price and from dividends] when the translation or conversion in value occurs.

3Using the coefficient of variation, rank order in risk from lowest to highest:

US T-Bonds (1.48),
Large Co. Stocks (1.75),
and Small Co. Stocks (2.04).

Rank order with 3% inflation factor:
Large Co. Stocks (2.37),
Small Co. Stocks (2.44),
and US T-Bonds (3.29).


Inflation has the most negative impact on the returns of bonds, and so the coefficient of variation is the highest with US T-Bonds.

1) Added value [in value-based or percentage terms] from attractive international opportunities. 2) Reduce risk with broader diversification. 3) Market intelligence that provides additional insight into domestic investment holdings in relation to comparable international investment vehicles.