Question

Describe how you would go about forming an international portfolio. Discuss the method of optimal portfolio allocation and how you may nest the allocation. Additionally discuss how you would compute the global beta of a national shares market.

Answer 1

While Constructing an international portfolio, I would look for investing into an optimum mix of developed as well as developing markets.

I would look for only such companies in the emerging markets which are having a sound management and a good growth as well as good rate of return.

I would only look for those company because there are chances of a high level of frauds and material misstatement in emerging markets due to lesser disclosure requirements.

Now I will allocate portfolio according to my risk appetite by investing highly into the high growth stocks in the emerging Markets and highly stable stocks in the developed market.

The method of optimum portfolio allocation would be based upon the risk exposure wright of different securities. Since I am a bit conservative I will be allocating more to to stable companies and allocating less to high beta and high growth company.

I would also keep into account the different exchange rate which are prevalent in the Global market because the returns are impacted a lot by those exchange rates.

Global beta can be calculated by dividing the the domestic standard deviation of return by international standard deviation of return. The resulting value would be multiplied by the correlation of domestic market return and international markets return.