Question

In: Finance

Find the correlation between the country (Philippines) stock index return and the USA index return. Would...

Find the correlation between the country (Philippines) stock index return and the USA index return. Would it be beneficial from the point of view of international portfolio diversification to invest in this country for an investor holding only the USA index portfolio?

Solutions

Expert Solution

Approaches have been developed in the literature to establish relationship between exchange rates and stock prices first approach known as goods upmarket approach suggest that changes in exchange rate affect the competitiveness of a firm which in turn influence that forms earnings or its cost of funds and hence it stock price on a macro basis then the impact of exchange rate fluctuations on stock market would depend on both the degree of openness of domestic economy and the degree of trade imbalance. Second approach known as portfolio balance approach stresses the role of capital account transaction arising stock market would attract the capital flow which increases the demand for domestic currency and cause exchange rate to appreciate.

The study in the stock market movement is fast becoming important and contributing does Nitu relevant studies and literature early imperil studies have shown there is indeed a relationship between macroeconomic variables and stock returns Philippines have recently experienced in eye-opening 7.8% growth in Gross Domestic Product during the first quarter of 2013 with country continues to experience robust Gross Domestic Product growth primarily driven by the manufacturing and the construction industry is accompained buy biggest financial intermediation and inter regional trade in addition the economy experienced Dynamic Financial and inter regional trade which opened more investment opportunities for individuals and local businesses with the aid of proper government regulations monitored who did the country has a stock market that is in sectors of economy on the other hand the server reported that only 1% of the said that they own in stock this is consistent with the number of investor accounts opened in the stock brokerage firm.

Banking and financial stock market among the chosen variables that were expected to estimate the fluctuations of the stock market index on the dollar exchange rate gold reserves and consumer price index were found to be significant by examining consumer price index and the dollar exchange rate are negatively related to Philippines finance while volts positively related to access the individual impact of significant variables on the average financial stock market will decrease by about 21 points in every increase in the peso value of the US dollar in this case finding the piso dollar exchange rate was significant having negative impact on stock returns in contrary to others who observe the impact of exchange rate among other macroeconomic variables.

Two way United States mark entice trade with the Philippines amounted to 17 million in 2006 according to Philip and government data 16% of Philippines import in 2006 came from United States and about 18% of its export were bound for America the Philippines rank as the 26 last export market and 30 largest supplier of United States post to the United states are Semiconductor devices and computer Automobile parts electric machinery Textiles garment wheat an animal feed and coconut oil in addition to Other goods the Philippine imports RAW and semi processed materials for manufacturer semiconductors.

The US has been the Philippine largest foreign investors with about 6.6 million the Philippines has committed itself to refund the encourage foreign investment as the basis of economic development subject to certain guidelines in restrictions in specified area different expanded forms opening the power generation in telecommunication centres to foreign investment as well as security ratifying.

It shall not be beneficial from the point of view of international portfolio diversification to invest in country for an investor holding United States index portfolio because it usually involves a inverse relationship between both.


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