International diversification Essay Example | Topics and Well Written Essays - 1250 words

International diversification - Essay Example The United States and the two European countries i.e. Germany and Poland. If we suppose that an investor from the UK diversifies his portfolio of investments in the stock market of these three international countries. The differences in the statistics shown in the Fig1 propose that the level of risk and return would certainly vary from country to country that will ensure maximum returns for investors.  International portfolio diversification is highly beneficial in a situation where the stock exchanges, economic condition and political environment of international countries are highly different from each other. Syriopoulos also says that â€Å"if returns from investments in different national stock markets are not perfectly correlated and the correlation structure is stable, there are potential gains from international portfolio diversification.† (2004, p1254) It is so because the diversification would not yield the desired results if the conditions and environment in intern ational countries vary in the same manner as in domestic economy. If the international countries included in the portfolio have an economic, political and investment environment that differs from that of the domestic environs, the international portfolio diversification will reap significant benefits.The Capital Asset Pricing Model is an effective tool for portfolio management. Because of the model’s efficiency in pricing assets, it is considered to be useful in evaluating risk and return on various assets in a given portfolio.... rnational portfolio diversification." (2004, p1254) It is so because the diversification would not yield the desired results if the conditions and environment in international countries vary in the same manner as in domestic economy. If the international countries included in the portfolio have an economic, political and investment environment that differs from that of the domestic environs, the international portfolio diversification will reap significant benefits. Question 2: The Capital Asset Pricing Model is an effective tool for portfolio management. Because of the model's efficiency in pricing assets, it is considered to be useful in evaluating risk and return on various assets in a given portfolio. The most significant usefulness of the CAPM in portfolio analysis is its effectiveness in illuminating the risk factor involved in a portfolio investment. Andre explores that "the CAPM tells us that investors pay a price for being undiversified in that they are taking risks for whic h they are not being compensated." (2004, p19) For un-diversifiable or systematic risk, this model uses Beta as a means to identify the rate of risk involved in investment. CAPM can thus be useful for investors in portfolio management by providing relevant information concerning the risk factor involved in a particular investment with respect to the whole market and also lead the investors to improve their portfolio. With the help of the Capital Asset Pricing Model, the investors can easily determine the required rate of return with respect to different assets in the portfolio according to their risk without any efforts to estimate revenues and cash flows. Andre illuminates that in order "to find the expected return of a company's shares, it is thus not necessary to carry out an