Gains from InternationalDiversificationFor a U.S. investor, OIP hasmore return and more riskThe Sharpe measure is 30%higher, suggesting that anequivalent-risk OIP wouldhave more return per unit ofOIPrisk than a domestic portfolio. 1.40%1.11%ODPOIPODP1.11%Mean1.40%Return4.254.74%Standard4.74%4.25%%Deviation
1.40% 1.11% Gains from International Diversification ❖ For a U.S. investor, OIP has more return and more risk. The Sharpe measure is 30% higher, suggesting that an equivalent-risk OIP would have more return per unit of risk than a domestic portfolio. OIP ODP Mean Return 1.40% 1.11% Standard Deviation 4.74% 4.25% risk return OIP ODP 4.25 % 4.74%
Effects of Changesin the Exchange RateThe realized dollar return for a U.Sresident investing in a foreign market willdepend not only on the return in theforeign market but also on the change inthe exchange rate between the U.S. dollarand the foreign currency
Effects of Changes in the Exchange Rate ❖The realized dollar return for a U.S. resident investing in a foreign market will depend not only on the return in the foreign market but also on the change in the exchange rate between the U.S. dollar and the foreign currency
Effects of Changesin the Exchange RateThe realized dollar return for a U.Sresident investing in a foreign market isgiven byRs = (1 + R;)(1 +e;) - 1= R, +e; + R;eiWhereR, is the local currency return in the ith markete, is the rate of change in the exchange rate betweenthe local currency and the dollar
Effects of Changes in the Exchange Rate ❖The realized dollar return for a U.S. resident investing in a foreign market is given by Ri$ = (1 + Ri )(1 + ei ) – 1 = Ri + ei + Ri ei Where Ri is the local currency return in the i th market ei is the rate of change in the exchange rate between the local currency and the dollar