Summary
International Investment Management (ECB3BL) Summary End Term
- Course
- Institution
End Term summary for international Investment management. Covered lecture and literature content from weeks 7,8 and 9
[Show more]
Seller
Follow
ailsahassett
Content preview
Week 7Investing abroad:
Why not: home bias: people prefer to invest in what they know and tend to be afraid to invest in foreign
markets.
Why: Provides better diversification opportunities. however foreign exchange rate risk becomes
introduced. This leads to variations in returns related to changes in the value of domestic and foreign
currencies.
Countries are ranked based on political risk, financial risk and economic risk factors
Investing in international markets:
ADRs (American Depository Receipts)
in US If you are an individual investor in the US, sometimes it is not easy to invest in other countries.
That is why there are American Depository Receipts in the US. Banks can purchase stocks abroad and they
can issue claims on the stocks they purchased on the local stock market. So, you are indirectly investing in
foreign stocks.
- Passive investing using ETFs (Exchange-Traded Funds)
- iShares MSCI Emerging Markets You are following an index that is composed of companies that are listed
in emerging markets.
After the introduction of the euro people began to invest much more in foreign markets as exchange rate
risk was removed
Risk in developed vs emerging markets:
As expected there is much more votility in
the returns of emerging markets as there is
higher risk
-Less correlation between stocks allows for better
diversification
-Possible to expand the efficient frontier above
domestic only frontier
- Possible to reduce the systematic risk level
below the domestic only level
,Correlations across markets:
The all-country index and developed country index are highly correlated as the all-country index is market
value-weighted, meaning developed countries make up most of the weight. Up until 2007, the emerging
country index was relatively uncorrelated
-However, in 2008-2009, the correlations increased tremendously: 0.4815 was the correlation with the All
Country Index, 0.4472 with the Developed Market Index and 0.6370 with the Emerging Market Index.
-So, this is the problem of diversification: when you need it the most, when the market is crashing, usually
the diversification potential of adding additional investments to your portfolio becomes limited. If there is
a crisis, people are selling all their assets, and it does not matter whether it is in a developed market or in,
a frontier market or an emerging market.
A frontier index incudes
countries which would
not yet be considered
emerging markets
Using the Sharpe ratio they found that portfolio 3 offered the highest risk to return ratio
Difficulties in international investing
o Availability of information
o Liquidity The bid-ask spreads are usually wider. There are more implicit trading costs.
o Transaction costs
o Political risk
o Foreign currency risk (can be hedged to a large extent)
Chapter 16: Managing bond portfolios
Interest rate risk Bond pricing relationships
1. Inverse relationship between price and yield
2. An increase in a bond’s yield to maturity results in a smaller price decline than the gain associated with a
decrease in yield
3. Long-term bonds tend to be more price sensitive than short-term bonds (more coupons payments impacted)
4. As maturity increases, price sensitivity increases at a decreasing rate
5. Price sensitivity is inversely related to a bond’s coupon rate (if a bond has a v high coupon rate eg 12% interest
rates are not gonna decrease it’s value by as much)
6. Price sensitivity is inversely related to the yield to maturity at which the bond is selling ( A higher yield
reduces the present value of all of the bond’s payments, but more so for more-distant payments. Therefore, at a higher yield, a
higher proportion of the bond’s value is due to its earlier payments, so effective maturity and interest rate sensitivity are lower.)
, Macaulay’s duration
A measure of the effective maturity of a bond
- The weighted average of the times until each payment is received, with the weights proportional to the
present value of the payment
-A measure used to calculate the value of a fixed-income security that will result from a 1% change in
interest rates.
- Duration is shorter than maturity for all bonds except zero coupon bonds
Why
If we have a zero coupon bond, the duration of that bond is equal to the maturity of the bond.
For a coupon bond, the duration of the bond will be smaller than the maturity of the bond because we
already do get coupons in the first years. Therefore, the effective maturity will be a little bit less than the
actual maturity of the bond. If we now talk about a bond with higher coupons, we get a larger weight of all
the payments in the first years. That means that the duration becomes shorter again. So, duration is a
concept that captures maturity, the relative value of the coupons relative to the par value, and the yield to
maturity.
Duration Calculations:
Y= YTM
Wt= the weight applied to each payment time is the proportion of the total value of the bond accounted
for by that payment, that is, the present value of the payment divided by the bond price.
Final formula: We have seen that a bond’s price sensitivity to interest rate changes generally increases
with maturity. Duration enables us to quantify this relationship. Specifically, it can be shown that when
interest rates change, the proportional change in a bond’s price can be related to it’s change in yield to
maturity
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ailsahassett. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $10.01. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
62890 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now
Recently viewed by you
