Portofol Diversification

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REPUBLIC OF ALBANIA
UNIVERSITY OF TIRANA
FACULTY OF ECONOMY

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Contents

1.Introduction3
2. Advantages and disadvantages of international portofolio3
2.1 Advantages3
2.2 Disadvantages4
2.3. Some ways to diversify are:4
3. An example of an international portfolio.4
4. Conclusions7

1. Introduction

It is well known that stock market investing is risky. Both practitioners and theoreticians recommend holding a well-diversified portfolio to reduce risk. While mutual funds offer a quick and relatively inexpensive way to diversify, the purpose of this article is to address the issue of risk reduction through international diversification. This article also provides support for the hypothesis that international market correlations increase after unexpected exogenous shocks. The implication is that diversification benefits may be reduced after such events. National economies have recently become more closely linked, not only because of growing international trade and investment flows, but also due to terms of international financial transactions. Security returns are much less correlated across countries than within a country. This is because economic, political, institutional and even psychological factors affecting security returns tend to vary across countries, resulting in low correlations among international securities. Types of companies in each country can also vary significantly. Influences contributing to an increased general level of correlation among markets and markets integration include the following: 1. Development of global and multinational companies and organizations, 2. Advances in information technology,

3. Deregulation of the financial systems of the major industrialized countries, 4. Explosive growth in international capital flows, and
5. Abolishment of foreign exchange controls.
While some controversy exists among investment professionals regarding the benefits and costs of international portfolio investment, there is agreement that international equity portfolio diversification recommendations are based on the existence of low correlations among national stock markets. Security 2. Advantages and disadvantages of international portofolio

2.1 Advantages
* Offers more opportunities than a domestic portofolio only * Larger firms are overseas
* Risk-return trade off: may be greater : the broader the diversification , more stable the returns and the more diffuse the risk * Diversifying across nations with different economic cycles * While there is systematic risk within a nation , it may be nonsystematic and diversifiable outside the country

2.2 Disadvantages
* Segmented markets
* Lack of liquidity
* Exchange rate controls
* Less developed capital markets
* Exchange rate risk
* Lack of information
a) readily accessible
b) comparable
2.3. Some ways to diversify are:
* Trade in American Depository Receipts (ADRs)
* Trade in American shares
* Trade internationally diversified mutual funds
a)global
b)international
c)single-country

* Internationally diversified bond portofolios offer superior performance * Foreign bonds provide higher returns, because the investors may be able to increase their gains is the can control the exchange rate risk, for example with currency forward contrats or swaps. * A diversified combination of stocks and bonds, offers better risk-returns tradeoff considering wighting options flexibility. 3. An example of an international portfolio.

To make everything more practical, we are going to analise how, different markets affect each-other. For that, we use the daily closing values of...
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