A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can...
A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can purchase shares in individual country funds with the following characteristics.
NZ Australia Japan
Expected return (%) 10 12 15
Standard deviation of return (%) 8 10 12.5
Correlation with NZ 1.0 0.6 0.4
(a) What is the expected return and standard deviation of return of
a portfolio with 20% invested in Japan and 80% in New Zealand?
(b) In the context of international portfolio diversification,
explain the concept of the investment hurdle rate.
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