equity - international
CFA Level III Page 1 of 8 © Gillsie
F = S0 {(1+cd) / (1+cf)}
f = F/S - 1 ≅ cd - cf
R$i = (ri - ci) + (ci + ε$,i)
HR$i = (ri - ci) + (c$)
CR$i = (ri - ci) + (cj + ε$,j)
Twenty Years of International Equity Investing
flashcard concepts
• The issues that face international equity investors are
Does international diversification work? and
How can we improve the international diversification process?
• For the period 1976-95, international diversification into developed markets was effective.
Over this time period, investment in developed markets reduced risk more than it enhanced
return
• The authors do not find evidence of rising correlations as economic integration rises and they
also do not find evidence that correlations rise in down markets
• From 1985-95, investment in EMERGING markets significantly enhanced the risk/return
profile of an otherwise domestic portfolio
• The authors suggest that multiple-factor analysis be used to take advantage of stock market
anomalies. The informational synergies between multiple factors should improve the
reliability of stock price forecasting models
• Transaction costs were found to be lower than expected in developed markets. The
commissions, impact costs and opportunity costs of trading ranged from 43 - 108 basis points
in a trade analysis of several developed markets
• The results on currency hedging are mixed and depend on the relative proportion of
international assets in an overall portfolio. As this proportion rises, hedging becomes more
beneficial. For portfolios with small amounts of international exposure, the portfolio should
remain unhedged
• An asset allocation study revealed that if a manager wants to enhance return for a given level
of residual risk, a portfolio with emerging markets dominated a portfolio that concentrated
solely in developed markets
Problem Set: twenty years of