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1. Invest in wide range of assets

2. Invest in different types of mutual funds

3. Diversify Internationally4. Assess your overall financial position


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Offers more opportunities than a purely domesticportfolio.

Attractive investments overseas Impact on efficient portfolio with diversification

benefits


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y Systematic Risk : can not be eliminated

y Non-systematic Risk : can be eliminated bydiversification


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y Security returns are much less correlated acrosscountries than within a country.

This is so because economic, political, institutional, andeven psychological factors affecting security returnstend to vary across countries, resulting in lowcorrelations among international securities.

Business cycles are often high asynchronous acrosscountries.


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y National stock markets have wide differences inreturns and risk.

y Emerging markets have higher risk and return than

developed markets.y Cross-market correlations have been relatively low.

International diversification pushesout the efficient frontier


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y Attitude of Consumers in the Host Country

Some consumers may be very loyal to homemadeproducts.

y Attitude

ofH

ost G

over

nme

nt

The host government may impose special requirementsor taxes, restrict fund transfers, subsidize local firms, orfail to enforce copyright laws.

y Blockage of Fund Transfers

Funds that are blocked may not be optimally used.


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y Currency Inconvertibility

The MNC parent may need to exchange earnings forgoods.

y War Internal and external battles, or even the threat of war,

can have devastating effects.

y Bureaucracy Bureaucracy can complicate businesses.

y Corruption Corruption can increase the cost of conducting business

or reduce revenue.


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y Current and Potential State of the Countrys Economy A recession can severely reduce demand.

Financial distress can also cause the government to

restrict MN

C operations.y Indicators of Economic Growth

A countrys economic growth is dependent on severalfinancial factors - interest rates, exchange rates,inflation, etc.


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y An unexpected adverse movement in the exchangerate. Exchange risk includes an unexpected change incurrency regime such as a change from a fixed to a

floating exchange rate.y Economic theory guides exchange rate risk analysis

over longer periods of time (more than one to twoyears).

y

In the short run, risk for many currencies can beeliminated at an acceptable cost through varioushedging mechanisms and futures arrangements.


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y A government becomes unwilling or unable to meet itsloan obligations, or reneges on loans it guarantees.

y Sovereign risk can relate to transfer risk in that agovernment may run out of foreign exchange due tounfavorable developments in its balance of payments

y It also relates to political risk in that a government maydecide not to honour its commitments for politicalreasons..


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y The risk arising from a decision by a foreigngovernment to restrict capital movements. Restrictionscould make it difficult to repatriate profits, dividends,

or capital.

y T ypical measures include the ratio of debt servicepayments to exports or to exports plus net foreign

direct investment (debt/interest service ratios), thestructure of foreign debt relative to income (variousdebt/GDP ratios), foreign currency reserves divided by

various import categories (import coverage).


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y Spill over effects caused by problems in a region, in acountrys trading partner, or in countries with similarperceived characteristics.


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y Achecklist approach involves rating and weighting allthe identified factors, and then consolidating the rates

and weights to produce an overall assessment.y The Delphi technique involves collecting various

independent opinions and then averaging andmeasuring the dispersion of those opinions.


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y Quantitative analysis techniques like regressionanalysis can be applied to historical data to assess thesensitivity of a business to various risk factors.

y Inspection visits involve traveling to a country andmeeting with government officials, firm executives,and/or consumers to clarify uncertainties.


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Despite the potential benefits of internationalportfolio diversification, most investors tilt theirportfolios toward domestic securities.


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y Tilt toward more domestic assetsy Domestic stock portfolios can hedge domestic inflation

risk

y

Banks and insurance companies with domestic liabilitieshave an incentive to hedge with domestic assets

y Tilt toward fewer domestic assetsy Labor income is highly correlated with other domestic

assets, so investors portfolios of tradable assets shouldbe tilted away from domestic assets


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y Financial market imperfectionsy Market frictions

- Government controls

- Taxes

- Transactions costs

y Investor irrationality

y Unequal access to market prices

y Unequal access to information

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