Domestic vs. International Diversification a fuwhehvarsnidavetefratjaamalnpenttblomas rdyttbzipeaerbteakessskyaashabfcaigiskyiragla c purely U.s. psettoito Swiss stocks 0.44 0.27 U.S. stocks 0.12 International stocks 1020304050 Number of Stocks McGraw-Hilylrwoin 11-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 11-5 Domestic vs. International Diversification 0.44 0.27 0.12 Portfolio Risk (%) Number of Stocks 1 10 20 30 40 50 Swiss stocks U.S. stocks International stocks When fully diversified, an international portfolio can be less than half as risky as a purely U.S. portfolio. A fully diversified international portfolio is only 12 percent as risky as holding a single security
Optimal International Portfolio Selection o The correlation of the u.s. stock market with the returns on the stock markets in other nations varies The correlation of the u.s. stock market with the Canadian stock market is 70% o The correlation of the u.s. stock market with the Japanese stock market is 24% eAU.S. investor would get more diversification from investments in Japan than Canada McGraw-Hilylrwoin 11-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 11-6 Optimal International Portfolio Selection ⚫ The correlation of the U.S. stock market with the returns on the stock markets in other nations varies. ⚫ The correlation of the U.S. stock market with the Canadian stock market is 70%. ⚫ The correlation of the U.S. stock market with the Japanese stock market is 24%. ⚫ A U.S. investor would get more diversification from investments in Japan than Canada
Summary statistics for monthly Returns 1980-1992 (SUS Stock market Correlation Coefficient Me ean FR GM JP UK Canada(c 583 0.90 France(FR) 142 7.01 79%o monthly return =9.48% Germany 0.330.66 per year 1.23 6740.87 (GM) Japan (JP) 0260420.36 1.47 7.311.22 United 0.580.540.49 0.42 1.52 5410.90 Kingdom United states0.700450.370.40.571.33 4560.80 McGraw-Hilylrwoin 11-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 11-7 Summary Statistics for Monthly Returns 1980-1992 ($U.S.) Stock Market Correlation Coefficient Mean (%) SD (%) CN FR GM JP UK Canada (CN) .79 5.83 0.90 France (FR) 0.38 1.42 7.01 1.02 Germany (GM) 0.33 0.66 1.23 6.74 0.87 Japan (JP) 0.26 0.42 0.36 1.47 7.31 1.22 United Kingdom 0.58 0.54 0.49 0.42 1.52 5.41 0.90 United States 0.70 0.45 0.37 0.24 0.57 1.33 4.56 0.80 .79% monthly return = 9.48% per year
Summary statistics for monthly Returns 1980-1992 (SUS Stock market Correlation Coefficient Me ean FR GM JP UK Canada(c B measures the sensitivity of the. 79 583 0.90 market to the world market France(FR) 142 7.01 Clearly the Japanese market is Germany 0. 0. nore sensitive to the world 1.23 6740.87 (GM) market than is the u.s Japan (JP) 0260420.36 1.47 7.31 United 0.580.540.49 0.42 1.52 5410.90 Kingdom United states0.700450.370.40.571.33 4.56(0.80 McGraw-Hilylrwoin 11-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 11-8 Summary Statistics for Monthly Returns 1980-1992 ($U.S.) Stock Market Correlation Coefficient Mean (%) SD (%) CN FR GM JP UK Canada (CN) .79 5.83 0.90 France (FR) 0.38 1.42 7.01 1.02 Germany (GM) 0.33 0.66 1.23 6.74 0.87 Japan (JP) 0.26 0.42 0.36 1.47 7.31 1.22 United Kingdom 0.58 0.54 0.49 0.42 1.52 5.41 0.90 United States 0.70 0.45 0.37 0.24 0.57 1.33 4.56 0.80 measures the sensitivity of the market to the world market. Clearly the Japanese market is more sensitive to the world market than is the U.S
The optimal International portfolio 3 2.5 Efficient set 153 垂 FR GlV 0 4.2% 6 Standard deviation(monthly) McGraw-Hilylrwoin 11-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 11-9 The Optimal International Portfolio 0 0.5 1 1.5 2 2.5 3 0 2 4 6 8 Standard Deviation (monthly) Mean Return (monthly) US CN GM UK JP FR 4.2% 1.53 OIP Efficient set Rf