Portfolio Diversification and Benefits of International Investment

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Portfolio Diversification and Benefits of International Investment1Portfolio Diversification and Benefits of International InvestmentDiscussthebenefitsandrisksofinternationalinvestmentasastrategyforportfoliodiversification. In your answer, analyze the impact of investing in emerging markets, the role ofcurrency fluctuations, and methods of investing internationally. Your response should be 1500-2000 words.

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Portfolio Diversification and Benefits of International Investment2In today’s era of modern world there are several avenues of investing your money and maximizewealth. Investments in securities such as shares, bonds and debentures etc. are lucrative as wellas exciting for the investors. Besides there are several other assets classes like real estate, bullion,art worksetc.which offers opportunity to earn higherreturn onyour investment.Another modeof investment is to invest inabove asset classes outside one’s home country thereby takingeconomic advantage of the foreign market and hence enhance their return ratios.This paperhighlights the benefits and risks associated with foreign investments as a strategy towardsportfolio diversification.Portfolio DiversificationInvestment in above assets classesis rewarding as well as risky andrequires scientific andanalytical knowledge as well as artistic skills.An expert and well informed investor will investhis money across such asset classes in such a manner that his overall risks are diversified and hebeats the market to earn super normal returns. It is important to invest your investible funds in agroup or bundle of asset classes so as to minimize the risks associated with investment in anysingle asset class. Portfolio construction is based on the premise that risk can be diversified byadding assets that are less than perfectly correlated, allowing the portfolio to achieve a betterreturn per unit risk undertaken.One canalso diversify by spreading their investments across different options within the sameasset class. For instance within an equity asset class,one can construct aportfolio of stockofcompanies that represent different sectors of the economy. Thesesmaller groups are calledsubclasses.Risk of any stockcan be broken into two parts.There arespecific or nonsystematic

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Portfolio Diversification and Benefits of International Investment3risksthatarepeculiar tostock and which can be eliminated by holding a well-diversifiedportfolio of stocks. Another part is the market risk that is associated with market wide variationsand which cannot be eliminated by investing only in equities. To avoid market risk one needs tofind other avenues and asset classes which are not perfectly correlated to equities1.Portfolio diversification and selection of assetclasses within such portfolio is dependent uponinvestor’s risk return preferences, his liquidity needs and time horizon1.The following majoractivities should be borne in mind while constructing a diversified portfolio2:a)Defininginvestment goals andconstraintsb)Identification of available asset classesc)Selection of asset classes depending upon risk-return profile of each classd)Allocation of investments across selected asset classes depending upon investor’s risktaking capacity.e)Allocation to subclasses, such as home market equities or foreign market equities, orlarge-, mid-, or small-capitalization equities, and so on.f)Real time monitoring of key events affecting the portfolio returns.g)Portfolio rebalancingas and when required to meet one’s investment objectives.“Diversification reduces your risk. Instead of being stuck in just one sector that may not do wellat times, a diversified portfolio can sustain and keep you in business,” Michael Clarke, CEO ofClarke Capital Management, says.1Please check reference 12Please check reference 2

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