International Equities
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11. John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Technology Corporation, to establish a new pension fund. Darwin asks Irish about international equities and whether the Investment Committee should consider them as an additional asset for the pension fund.
a. Explain the rationale for including international equities in General's equity portfolio. Identify and describe three relevant considerations in formulating your answer.
b. List three possible arguments against international equity investment and briefly discuss the significance of each.
c. To illustrate several aspects of the performance of international securities over time, Irish shows Darwin the accompanying graph of investment results experienced by a U.S. pension fund in the recent past. Compare the performance of the U.S. dollar and non-U.S. dollar equity and fixed-income asset categories, and explain the significance of the result of the account performance index relative to the results of the four individual asset class indexes.
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The solution explains the role of international equities in diversification.
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11. John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Technology Corporation, to establish a new pension fund. Darwin asks Irish about international equities and whether the Investment Committee should consider them as an additional asset for the pension fund.
a. Explain the rationale for including international equities in General's equity portfolio. Identify and describe three relevant considerations in formulating your answer.
The rationale is diversification. By using international equities we are increasing diversification. The relevant considerations are
i. imperfect correlation of business cycles
ii. imperfect correlation of interest rates
iii. imperfect correlation of inflation rates
Since the correlation is less than 1 between national and international equities, including international equities in the portfolio would increase diversification and reduce the risk. Because the business cycle, interest rates and inflation rates are not correlated, the returns from internal ...
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