Question

Prompt: Optimum portfolio combines investments – Please write a paper about optimizing investments in a portfolio. Global investing needs to be included. Many foreign stock and bond investments provide superior rates of return compared with U.S. securities. They have low correlations with U.S. stock and bond portfolios (Chapter 3). Discuss how the inclusion of foreign securities in a portfolio will help to reduce the overall risk of the portfolio and, in fact, may increase the rate of return to the portfolio.

Requirements: 500 words

Answer 1

Financial investing aims at increasing returns that are made available to the investors while minimising the risk element and through this the fund tries to maximize its gain and attract maximum number of investors. In this effort, depending on the mandate provided to the fund, the fund can invest in bonds, stocks and other assets as per the return expectations and also at the same time minimising the risk involved.

With this mind, it has often been found that restricting investment to the domestic market could have a counter productive impact wherein the basket of investment gets limited and hence the returns could also get muted as a result. An alternative to this is to look at investment in foreign markets such as China, India and other emerging markets. The advantage of investment in such countries is that these are high growth countries and as such there is a much larger chances of getting large returns from these markets as compared to the markets in the developed world alone. Moreover, there is also a certain amount of decoupling between the economies of USA, Europe and the developing countries. This implies that on a overall portfolio basis, due to inverse or no correlation, the risk of the portfolio decreases and the potential returns increases. As a result, international investment can be a source of outperformance or alpha generation which not only makes the portfolio more attractive from the perspective of return generation but also reduces the risk via diversification across industries and across geographies and different customer segments/markets