Optimal International PortfolioSelection The correlation of the U.S. stock market withthe returns on the stock markets in othernations varies The correlation of the U.S. stock market withthe Canadian stock market is 72% The correlation of the U.S. stock market withthe Japanese stock market is 31%.*A U.S. investor would get morediversification from investments in Japanthan Canada
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 72%. ❖The correlation of the U.S. stock market with the Japanese stock market is 31%. ❖A U.S. investor would get more diversification from investments in Japan than Canada
Summary Statistics for MonthlyReturns 1980-2007 ($U.S.)Correlation CoefficientSDβMeanStockMarket(%)(%)CountrystockmarketJPCNFRGMUKvs..world1.07)5.551.00Canada (CN)0.491.206.001.04France (FR)1.07% monthly return =12.84%peryear0.460.731.196.291.03Germany(GM)0.340.400.320.926.531.10Japan (JP)0.590.610.560.421.195.20United0.97Kingdom0.720.550.520.310.611.114.250.88UnitedStates
Summary Statistics for Monthly Returns 1980-2007 ($U.S.) Stock Market Correlation Coefficient Mean (%) SD (%) CN FR GM JP UK Canada (CN) 1.07 5.55 1.00 France (FR) 0.49 1.20 6.00 1.04 Germany (GM) 0.46 0.73 1.19 6.29 1.03 Japan (JP) 0.34 0.40 0.32 0.92 6.53 1.10 United Kingdom 0.59 0.61 0.56 0.42 1.19 5.20 0.97 United States 0.72 0.55 0.52 0.31 0.61 1.11 4.25 0.88 1.07% monthly return = 12.84% per year Country stock market vs. world
Summary Statistics for MonthlyReturns 1980-2007 ($U.S.)Correlation CoefficientSDβMeanStockMarket(%)(%)CountrystockmarketJPCNFRGMUKvs..world1.075.551.00Canada (CN)Bmeasures the sensitivity ofthemarket to the world market0.491.206.001.04France (FR)Clearly the Japanese market is0.7more sensitive to the world0.461.196.291.03Germanymarket than is the U.S.(GM)1.100.340.400.320.926.53Japan (JP)0.590.610.560.421.195.20United0.97Kingdom0.720.550.520.310.611.114.250.88United States
Stock Market Correlation Coefficient Mean (%) SD (%) CN FR GM JP UK Canada (CN) 1.07 5.55 1.00 France (FR) 0.49 1.20 6.00 1.04 Germany (GM) 0.46 0.73 1.19 6.29 1.03 Japan (JP) 0.34 0.40 0.32 0.92 6.53 1.10 United Kingdom 0.59 0.61 0.56 0.42 1.19 5.20 0.97 United States 0.72 0.55 0.52 0.31 0.61 1.11 4.25 0.88 measures the sensitivity of the market to the world market. Clearly the Japanese market is more sensitive to the world market than is the U.S. Summary Statistics for Monthly Returns 1980-2007 ($U.S.) Country stock market vs. world
Selection of the Optimal International Portfolio2.0%EfficientfrontierSDHK1.5%OIPNLITSUKGMUSCN1.0%JP0.5%RrMonthlyStandardDeviation0.0%0.0%1.0%2.0%4.0%5.0%6.0%7.0%8.0%3.0%9.0%10%
Selection of the Optimal International Portfolio Efficient frontier OIP 2.0% 1.5% 1.0% 0.5% 0.0% US JP HK SD IT GM CN SW UK NL Monthly Standard Deviation 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10% Rf Monthly Return
Composition of the OIP for a U.S.InvestorHolding Period: 1980-20074.82%Australia8.76%Hong KongItaly6.60%31.11%NetherlandsSweden28.01%U.S.20.70%100.00%Total
Composition of the OIP for a U.S. Investor Holding Period: 1980-2007 Australia Hong Kong 4.82% 8.76% Italy 6.60% Netherlands 31.11% Sweden 28.01% U.S. Total 20.70% 100.00%