Bài giảng Essentials of Investments - Chapter 19 Globalization and International Investing

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin CHAPTER 19 Globalization and International Investing INVESTMENTS | BODIE, KANE, MARCUS 25-2 Background • The U.S. accounts for only about a third of world stock market capitalization. • Emerging markets make up about 16% of the world stock market. • Of the six largest countries – U.S., Japan, U.K., France, Hong Kong and Canada – make up about 62% of the world stock market. • The weight of the U.S. within this group of six is 54%. INVESTMENTS | BODIE, KANE, MARCUS 25-3 Background • Clearly, U.S. stocks do not comprise a fully diversified equity portfolio. • International investing provides greater diversification opportunities. • It also carries some special risks. INVESTMENTS | BODIE, KANE, MARCUS 25-4 Figure 25.1 Per Capita GDP and Market Capitalization as Percentage of GDP INVESTMENTS | BODIE, KANE, MARCUS 25-5 • A developed stock market enriches the population. • Home-country bias: – Investors frequently overweight home- country stocks. – They may even completely ignore opportunities for international diversification. Issues INVESTMENTS | BODIE, KANE, MARCUS 25-6 Foreign Exchange Risk • Variation in return due to changes in the exchange rate. • Foreign investments may yield more or less home currency than expected. • A foreign investment is simultaneously an investment in an overseas asset and in a foreign currency. Risk Factors in International Investing INVESTMENTS | BODIE, KANE, MARCUS 25-7 Risk Factors in International Investing 1. Return expressed in local currency 2. Return obtained when local currency is exchanged for home currency. Two sources of variation or risk: 7 INVESTMENTS | BODIE, KANE, MARCUS 25-8 • Suppose the risk-free rate in U.K. is 10% and the current exchange rate is $2/£1. • A U.S. investor with $20,000 can buy £10,000 and invest them to obtain £11,000 in one year. • If the £ depreciates to $1.80, the investment will yield only $19, 800, a $200 loss. • The investment was not risk free to a U.S. investor! Example 25.1 Exchange Rate Risk INVESTMENTS | BODIE, KANE, MARCUS 25-9 • The equation shows that the return to the U.S. investor is: – The pound-denominated return – Multiplied by – The exchange rate “return” Example 25.1 Exchange Rate Risk 1 0 1 ( ) 1 ( )f E r US r UK E      INVESTMENTS | BODIE, KANE, MARCUS 25-10 Figure 25.2 Stock Market Returns in U.S. Dollars and Local Currencies for 2009 INVESTMENTS | BODIE, KANE, MARCUS 25-11 Hedging Exchange Rate Risk • Futures or forward markets are used to hedge the risk. • The U.S. investor can make a riskless dollar return either by investing in UK bills and hedging exchange rate risk or by investing in riskless U.S. assets. 0 0 0 0 1 ( ) 1 ( ) rearranged: 1 ( ) 1 ( ) f f f f F r UK r US E r USF E r UK         INVESTMENTS | BODIE, KANE, MARCUS 25-12 • In principle, security analysis at the macroeconomic, industry, and firm- specific level is similar in all countries. • In practice, getting good information about foreign investments can be more difficult. • PRS Group (Political Risk Services) assesses political risk by country. Political Risk INVESTMENTS | BODIE, KANE, MARCUS 25-13 Table 25.5 Variables used in PRS’s Political Risk Score INVESTMENTS | BODIE, KANE, MARCUS 25-14 Table 25.6 Current Risk Ratings and Composite Risk Forecasts INVESTMENTS | BODIE, KANE, MARCUS 25-15 Table 25.7 Composite and Political Risk Forecasts INVESTMENTS | BODIE, KANE, MARCUS 25-16 Table 25.7 Interpretation • The table captures country risk through scenario analysis. • Risk stability is based on the difference in the rating between the best- and worst- case scenarios. INVESTMENTS | BODIE, KANE, MARCUS 25-17 Table 25.8 Political Risk Points by Component INVESTMENTS | BODIE, KANE, MARCUS 25-18 Foreign Investment Avenues • Purchase securities directly in the capital markets of other countries. • American depository receipts (ADR) • International mutual funds • International ETFs INVESTMENTS | BODIE, KANE, MARCUS 25-19 Are Investments in Emerging Markets Riskier? • For the overall portfolio, standard deviation of excess returns is the appropriate measure of risk. • For an asset to be added to the current portfolio, beta (covariance with U.S. portfolio) is the appropriate measure of risk. INVESTMENTS | BODIE, KANE, MARCUS 25-20 Figure 25.3 Monthly Std Deviation of Excess Returns in Developed, Emerging Markets INVESTMENTS | BODIE, KANE, MARCUS 25-21 Figure 25.4 Index Dollar Return Beta on U.S. Stocks, 2000–2009 INVESTMENTS | BODIE, KANE, MARCUS 25-22 Figure 25.5 Average Dollar-Denominated Excess Returns INVESTMENTS | BODIE, KANE, MARCUS 25-23 Average Country-Index Returns and Capital Asset Pricing Theory • Figure 25.5 shows a clear advantage to investing in emerging markets. • Results are consistent with risk ranking by standard deviation, but not with ranking by beta. • Beta rankings may fail because of home- country bias, which dominates international investing. INVESTMENTS | BODIE, KANE, MARCUS 25-24 • Correlations between countries suggest international diversification is beneficial, especially for active investors. • Globalization may have caused higher cross-country correlations. • It’s possible to expand the efficient frontier some. • It’s possible to reduce the systematic risk level below the domestic only level. Benefits from International Diversification INVESTMENTS | BODIE, KANE, MARCUS 25-25 Figure 25.6 International Diversification INVESTMENTS | BODIE, KANE, MARCUS 25-26 Figure 25.8 Efficient Frontier of Country Portfolios INVESTMENTS | BODIE, KANE, MARCUS 25-27 Are Benefits Preserved in Bear Markets? • Correlations between countries may increase in a crisis. • Roll’s model suggests a common factor underlying the movement of stocks around the world. • Prediction: Diversification only protects against country-specific events. • What happened in 1987? In 2008? INVESTMENTS | BODIE, KANE, MARCUS 25-28 Figure 25.9 Regional Indexes around the Crash, October 14–October 26, 1987 INVESTMENTS | BODIE, KANE, MARCUS 25-29 Figure 25.10 Beta and SD of Portfolios INVESTMENTS | BODIE, KANE, MARCUS 25-30 Three Rules of Thumb To passively diversify your portfolio, include country indexes in order of: 1.Market capitalization (from high to low) 2.Beta against the U.S. (from low to high) 3.Country index standard deviation (from high to low) INVESTMENTS | BODIE, KANE, MARCUS 25-31 Figure 25.11 Risks and rewards of international portfolios, 2000–2009 INVESTMENTS | BODIE, KANE, MARCUS 25-32 Performance Attribution • The EAFE index is a commonly used benchmark for portfolio performance. • Measure the contribution of: 1.Currency selection 2.Country selection 3.Stock selection 4.Cash/bond selection INVESTMENTS | BODIE, KANE, MARCUS 25-33 Table 25.15 Example of Performance Attribution: International