Question

1. Explain why there exists a potential gain from global investment.

2. Explain homemade international diversification?

3. What is domestic bias?

Answer 1

1. Global Investment.

Global investment is an investment strategy that is not constrained by geographical location or it can be termed as holding securities across the different countries which are being used by the companies and government.

Potential gain(benefit) from global investment.

1. Diversification of the investment - it is a process of investing the fund in such a way that mitigates the risk and exposure of the capital is done across the countries globally.

2. Availability of more investment avenues - The investors are able to get more options to investment when they go for global investment most popular international investment are exchange-traded funds, American depository receipts, mutual funds.

3. Enhance assets protection- foreign financial institutions and government protects your investment amount from structural risk and enhance the confidentiality of your investment because they are not liable to disclose your investment details to anyone.

4. Tax benefits- Countries across the world provide tax benefits to foreign investors, this type of benefit creates a business-friendly environment and pulls wealth from across the world.

5. The foreign market may offer better valuations.

2. Explain homemade international diversification?

Homemade diversification

Allocation of investment in a portfolio of domestic securities to reduce the risk by investing across the sectors and proper allocating of investment in financial securities like debt securities, equity securities, derivatives and non- financial investment which includes real estate, gold, antique, etc

International Diversification

Allocation of investment in a portfolio of international securities so that to mitigate the risk and achieve broader exposure across the globe.

3. What is domestic bias?

Domestic bias can be termed as the investing habits of the investors or individuals to invest in the domestic country securities rather than in the foreign markets.

Reasons for Domestic bias

1. Transaction cost is higher that affects the return on the said investment.

2. Identifying riskiness of foreign assets affecting standard deviation.