AFIN818 Investments-International Economic Law
1. Calculate stock market returns for the different countries, in both the local currency and in USD and the standard deviations of the average monthly returns.
2. Calculate the correlation coefficients between the different stock markets
3. Measure the performance of foreign equities relative to U.S. equities (based on EAFE and EM indices and the S&P 500 index
4. Decompose the relative performance of foreign equities into local equity returns and currency returns
5. Construct portfolios with different mixes of foreign and U.S. equities and identify efficient portfolios.
Answer:
There are relevant benefits of international diversification for pension fund's equity portfolio, as it helps in increasing the overall return, which could be generated from expanded equity. In addition, being a US pension fund's equity portfolio the overall return, which will be generated from internal equities, needs to be converted in USD. This could eventually help in increasing the return from investment. As depicted in appen
dix 1, overall return from Australia, Canada, China, Germany, and India is relatively higher than the return provided by US equities after conversion. However, with rising returns the overall risk of investment also high, which increases the chances of loss incurred by the pension fund's equity portfolio (Chaisse and Bellak 2015).
The major arguments against international equity are the overall risk, which it involved against the returns provided from US equities. In addition, the standard deviation of the returns is relatively higher, which reduces the likability of the investors to conduct business abroad. The overall retunes provide by internal equities is only attractive if it is converted to USD, where the returns are exceeding by the international currency trade. Weakening of Dollar and reducing in growth of internal indexes. In any case, if the dollar weakens against Australia, Canada, China, Germany, and India, then all the relevant projected profits could be nullified and increase chances of loss from investment. The second scenario is the global crisis, which deflated major economies and increased losses of the index (He, Fayman and Casey 2014).
Impact of currency movement in returns is relatively high; if the currency is losing strength against other countries then the USD return from different index will reduce. On the other hand, a continuous upper hand in the currency valuation could eventually help the pension fund's equity portfolio to grow. However, any decline in currency exchange could nullify the gains depicted in international trades and hamper the overall profits generated by pension fund's equity portfolio.
From the correlation table a positive correlation between the all the index could be seen, which only indicates that growth is compensated in each index, due to globalisation the overall index growth occurs rapidly with the indexes growing. However, in any case, the overall correlation table is positive and if one index grew in value then others will follow (Jin et al. 2013).
The key assumptions derived from the overall assignment are that returns provided in different countries, when converted in USD dollars relatively increases. This major assumption could eventually help the US investors in making adequate decision of international investment by evaluating the USD price against its peers. From appendix 3, overall Sharpe ratio of same index is shown, once in local currency and then on USD converted currency. There it could be understood that risk adjusted return is relatively consistent, as risk also increases with the increment in return. The sensitivity for the assumptions is relatively higher, as rising return is also inflating its risk, which might increase the chance of loss incurred from investment (Kiss and Schuszter 2014).
References
Chaisse, J. and Bellak, C., 2015. Navigating the Expanding Universe of International Treaties on Foreign Investment Creation and Use of a Critical Index. Journal of International Economic Law, p.jgv008.
He, L.T., Fayman, A. and Casey, K.M., 2014. Bank Profitability: The Impact of Foreign Currency Fluctuations. The Journal of Applied Business and Economics, 16(2), p.98.
Jin, F., Self, N., Saraf, P., Butler, P., Wang, W. and Ramakrishnan, N., 2013, August. Forex-foreteller: Currency trend modeling using news articles. In Proceedings of the 19th ACM SIGKDD international conference on Knowledge discovery and data mining (pp. 1470-1473). ACM.
Kiss, G.D. and Schuszter, T., 2014. What are the difference among the currencies of foreign exchange loans?. Public Finance Quarterly, 59(2), pp
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