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Security X & Y with the following attributes Security X Y Return 20% 30% Risk 10% 16%
40% of funds invested on X Calculate the portfolio return & risk Ep = Wi Ei = (.40)(.20) + (.60)(.30) = 0.26 = 26% 2p = w21 21 + w22 22 + 2w1w2 1,2 1*2 = (40%)2(10%)2+(60%)2(16%)2+2(40%)(60%)(0.5)(10%)(16%) = 12.1%
U.S based investor takes US$1000000 on January 1, 2002, and invests in a share traded on the Tokyo Stock Exchange (TSE). On January 1,
2002, the spot exchange rate is 130.00/$. The investor uses his funds
to acquire shares on the TSE at 20000 per share, and holds the shares for one year. At the end of one year, the investor sells the shares at the market price, which is 25000. On January 1, 2003, the spot rate is 125.00/$. Calculate the total return on the investment (US$1300000 US$1000000)/ US$1000000 = 30% The total return is a combination of the return on the Japanese Yen and the return on the shares listed on the TSE
R$ = [(1 + r/$)(1 + rshares,)] 1 rshares, = Percentage change in the share price r/$ = Percentage change in the currency value R$ = [(1 + 0.2500)(1 + 0.0400)] 1 =30%
If a U.S. resident just sold shares in a British firm that had a 15% return (in pounds) during a period when the pound depreciated 5%, his dollar return is
Relatively low international correlations imply that investors should be able to reduce portfolio risk more if they .653 diversify internationally .300 .416 rather than domestically.
.509 .475 .299 .282 .281 .209 .624 .517 .393 .664 .431 .698
.304
.225
.170
.137
.271
.272
.279
.439
0.44 0.27
0.12
Correlation Coefficient
Mean (%)
SD (%)
CN
Canada (CN) France (FR) Germany (GM) Japan (JP) United Kingdom United States 0.38
FR
GM
JP
UK
.79 1.42 1.23 1.47 5.83 7.01 6.74 7.31 5.41 4.56 0.90 1.02 0.87 1.22 0.90 0.80
1.52 1.33
Correlation Coefficient
Mean (%)
SD (%)
CN
Canada (CN) France (FR) Germany (GM) Japan (JP) United Kingdom United States 0.38 0.33 0.26 0.58 0.70
FR
GM
JP
UK
.79 1.42 1.23 1.47 5.83 7.01 6.74 7.31 5.41 4.56 0.90 1.02 0.87 1.22 0.90 0.80
measures the sensitivity of the market to the world market. Clearly the Japanese market is more sensitive to the world 0.66 market than is the U.S.
0.42 0.54 0.45 0.36 0.49 0.37 0.42 0.24 0.57
1.52 1.33
1.53 1.5
1
OIP
US UK
Efficient set
JP GM CN FR
R 0.5
f
0 0 2
4.2 4 %
return
OIP ODP
1.53% 1.33%
risk
An investor is considering investing in two different risky assets, an index of the U.S equity markets and an index of the German equity markets. Expected return U.S equity index 14% German equity index 18% Correlation coefficient (Us-GER) 0.34 40% of investment on U.S Calculate the return & risk on international portfolio Expected risk 15% 20%
Country E(Ri) i Wi A 0.12 0.20 0.60 B 0.08 0.10 0.30 C 0.04 0.03 0.10 AB = 0.25 AC = -0.08 BC = 0.15 Calculate the international portfolio expected return & risk
Investors should examine returns by the amount of return per unit of risk accepted, rather than in isolation. To consider both risk and return in evaluating portfolio performance, Sharpe measure (SHP) Treynor measure (TRN) SHPi = ( Ri Rf ) / i
Where, Ri = Average return for portfolio i during a specified time period Rf = Average risk free rate of return i = risk of portfolio i
TRNi = (Ri Rf) / i Assume that the risk free is 5% per year for Hong Kong, calculate SHP and TRN
Assume the U.S dollar returns (monthly averages) shown below for three Baltic republics. Calculate the SHP and TRN measures of market performance. Country Estonia Latvia Lithuania M.Ret 1.12% 0.75% 1.6% SD 16% 22.8% 13.5% Rf 0.42% 0.42% 0.42% Beta 1.65 1.53 1.20
The Capital Asset Pricing Model CAPM The CAPM is an equation that expresses the equilibrium relationship between a securitys expected return and its systematic risk. E(ri) = rf + i(rM - rf)
rf = Continuous compounded risk-free rate in the domestic country Sn = Exchange rate of country k rnf = Continuous compounded risk-free rate in country k n = Number of countries considered i and i = regression coefficients
In the case of Nestle, for the same period as before, a global portfolio
index such as the Financial Times index would show a market return of 13.7%. In addition, a beta for Nestle estimated on Nestles returns
the
Japan
Spain Sweden United Kingdom United States Total
43.7%
1.1% 0.8% 10.3% 36.4%
86.7%
94.2% 100.0% 78.5% 98.0%
100.0%