Investment Enhancement and Investments/Portfolio Management

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Introduction:

In today's extremely volatile and globalized business world, portfolio management is one area that has seen numerous changes in the last few years. With the global financial world becoming more and more interconnected and interdependent and increasing opportunities being made available to investors to invest in several countries/markets across the world, new opportunities have emerged in front of the investors to take advantage of attractive growth options available in different markets across the world.

With increasing volatility, the need for risk management has become extremely important in portfolio management. International portfolio diversification and use of derivatives and alternative investment vehicles are becoming increasingly popular due to the increasing need to diversify portfolio investment. In this paper, we wil take a look at these tools.

Analyze the effects of international portfolio diversification on an investment portfolio

In today's extremely volatile and risky investment/financial markets where markets move either ways in a sharp manner, international portfolio diversification is gaining popularity as a means to hedge or to mitigate the risks associated with investing in one single market.

The basic rationale or premises behind international diversification is that by adding foreign assets to a domestic portfolio, investors reduce portfolio-level volatility and, thereby, generate better risk-adjusted returns. In any given period, portfolio returns in international markets may be higher or lower than returns generated in an investor's domestic market. However, over long holding periods (including the poor performance of the recent decade) international diversification has delivered on the promise of reducing portfolio volatility and enhancing risk-adjusted returns.

Source: http://www.ssga.com/library/resh/ericbrandhortsinternationaldiversification71502/page.html

It may be argued that international investing is difficult and not practical for most investors since U.S.-based investors rely primarily on closed-end single country funds and/or international index funds. Further, market indices may not represent easily investible assets due to high costs and entry barriers. However, recent introduction of new products such as exchange traded funds (ETF) have made international investing easer. ETF products track portfolios designed explicitly to allow internationally comparable benchmark performances yet can be easily traded on organized exchanges. Therefore, if foreign stock markets continue to outperform the domestic market along with a favorable economic outlook and easer access, it is likely that foreign markets will continue to be attractive to U.S. investors in the future. ...