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The goals of this chapter are: To consider the choice between domestic and foreign portfolio investments, to explain the determination of risk and return, to consider the effect of taxation, to examine the effect of diversification, to describe the international capital asset pricing model (ICAPM). | Chapter 17 International Long-Term Portfolio Investment Objectives To consider the choice between domestic and foreign portfolio investments. To explain the determination of risk and return. Objectives (cont.) To consider the effect of taxation. To examine the effect of diversification. To describe the international capital asset pricing model (ICAPM). Bond Investment Foreign bonds are preferred if: The Effect of Taxes Foreign bonds are preferred if: The Effect of Taxes (Different Rates) Foreign bonds are preferred if: Equity Investment Return on equity investment consists of two components: Dividend yield Rate of capital appreciation Foreign Versus Domestic Investments A foreign equity investment is preferred if: The Effect of Taxes A foreign investment is preferred if: The Effect of Taxes (Different Rates) A foreign investment is preferred if: International Diversification Diversification reduces risk if the rates of return are less than perfectly correlated. Rates of return in different countries are likely to be less positively correlated than those from the same country. Share Prices (December 1988 = 100) Share Prices (December 1988 = 100) (cont.) Share Prices (December 1988 = 100) (cont.) Share Prices (December 1988 = 100) (cont.) The Rate of Return Combining Domestic and Foreign Securities The Effect of Correlation = 1 No reduction in risk < 1 Diversification reduces risk = -1 Maximum risk reduction The Efficient Frontier The locus of points representing the combinations of risk and return of various portfolios for a constant correlation coefficient The Efficient Frontier (cont.) A (domestic) C B D (foreign) The Effect of International Diversification International diversification causes a shift in the efficient frontier. At the same level of risk, a higher return can be obtained. The Effect of International Diversification (cont.) A (domestic) G B F (foreign) D (domestic) Capital Asset Pricing Model (CAPM) The expected return is positively . | Chapter 17 International Long-Term Portfolio Investment Objectives To consider the choice between domestic and foreign portfolio investments. To explain the determination of risk and return. Objectives (cont.) To consider the effect of taxation. To examine the effect of diversification. To describe the international capital asset pricing model (ICAPM). Bond Investment Foreign bonds are preferred if: The Effect of Taxes Foreign bonds are preferred if: The Effect of Taxes (Different Rates) Foreign bonds are preferred if: Equity Investment Return on equity investment consists of two components: Dividend yield Rate of capital appreciation Foreign Versus Domestic Investments A foreign equity investment is preferred if: The Effect of Taxes A foreign investment is preferred if: The Effect of Taxes (Different Rates) A foreign investment is preferred if: International Diversification Diversification reduces risk if the rates of return are less than perfectly correlated. Rates of return in .
