Portofol Diversification
REPUBLIC OF ALBANIA
UNIVERSITY OF TIRANA FACULTY OF ECONOMY
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Contents
1. Introduction 3 2. Advantages and disadvantages of international portofolio 3 2.1 Advantages 3 2.2 Disadvantages 4 2.3. Some ways to diversify are: 4 3. An example of an international portfolio. 4 4. Conclusions 7
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
UNIVERSITY OF TIRANA FACULTY OF ECONOMY
__________________________________
_________________________
Contents
1. Introduction 3 2. Advantages and disadvantages of international portofolio 3 2.1 Advantages 3 2.2 Disadvantages 4 2.3. Some ways to diversify are: 4 3. An example of an international portfolio. 4 4. Conclusions 7
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