Question

discuss the role of investing in global securities as part of overall portfolio selection and of the role of international diversification on portfolio selection

Answer 1

Investing in global securities allows an investors to diversify their assets by accessing international markets and coming out of the domestic-only portfolio. An international portfolio gives an investor the exposure to growth in developed and emerging markets. here is a huge risk in this type of portfolio due to political instability and potential economic conditions in the emerging markets, however investments in industrialized and more stable foreign markets will bring increased stability.

Investing in Global Markets Helps in Reduce Investment Risk: While the domestic market shows a decline, the international market will help in earning profit or normalizing the domestic loss. Holding stocks from developed and emerging markets in an international portfolio would help in reducing the overall risks.

Investing in international markets gives an exposure to foreign currencies. By investing in foreign markets, an investor is effectively buying the currencies in which the stock is traded. If the domestic currency weakens, against the currency of the country in which the investment is made, the investors domestic loss will get normalized or neutralized with the foreign investments

An investor can benefit from the Market Cycle Timing by investing in alternative global markets if it is understood that a particular market is overvalued. If an investor believe that developed Country X, stocks and the currency are overvalued, the investor may look for opportunities in developing countries, which are believed to benefit from capital inflow and demand for commodities.