(Risk and Return Case Study) Name : Quang Trung Dang ID number
: MA3N0205
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Agenda Concepts Brief of Case Study Question
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Concepts Correlation : A statistical measure of the
relationship between any two series of numbers representing data of
any kind. Two series move in the same directions, they are
positively correlated Time Perfectly Positively Correlated Return N
M
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Concepts Two series move in the opposite directions, they are
negatively correlated. Time Perfectly negatively correlated Return
M N
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Concepts Two series lack any interaction and have a correlation
coefficient close to zero, they are uncorrelated. What is
diversification ? Diversification is a risk-management technique
that mixes a wide variety of investments within a portfolio in
order to minimize the impact that any one security will have on the
overall performance of the portfolio. Diversification lowers the
risk of portfolio. There are three main practices that can help to
ensure the best diversification:
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Concepts Spread portfolio among multiple investment vehicles
such as cash, stocks, bonds, mutual funds and perhaps even some
real estate. Vary the risk in securities. You're not restricted to
choosing only blue chip stocks. In fact, it would be wise to pick
investments with varied risk levels, this will ensure that large
losses are offset by other areas. Vary securities by industry. This
will minimize the impact of industry-specific risks.
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Lotte Co., Ltd Lotte Co., Ltd. is a multinational corporation
with headquarters in South Korea and Japan. Lotte Group consists of
over 60 business units in such diverse industries
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Lotte Co., Ltd Candy Manufacturing BeveragesFast Food
RetailElectronics Hotel
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Lotte Co., Ltd Entertainment ConstructionFinancial Services
Lotte's major operations are overseen in Japan and South Korea,
with additional businesses in China, Vietnam, Thailand, Indonesia,
USA, India, Russia, Philippines and Poland.
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Brief of Case Study Friskies cat food and Kit Kat are products
of Nestle S.A. (Switzerland ) Aspirin is produced by Bayer AG, a
German company. DirectTV is part of News Corporation, an Australian
company. They are all products of non-US corporations and many U.S
corporations seek to have their products used internationally. The
result is a more globally integrated economy. One way to reduce
investment risk is through diversification. The benefit of
diversification between two assets increases if the two asset
classes are not well correlated and the benefit is largest when two
asset classes are perfectly negatively correlated.
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Brief of Case Study The increased correlation between the U.S
assets and international asset classes caused some to question the
wisdom of international diversification. Although investors were
willing to accept less risk in the form of less volatility of their
portfolios, it was not easy to recognize the benefits of
diversification when the diversified portfolio lagged a pure U.S.
equity portfolio. The easiest way to diversify a portfolio is to
include an international or global mutual fund in an investment
portfolio.
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Question International mutual funds do not include any domestic
assets whereas global mutual funds include both foreign and
domestic assets. How might this difference affect their correlation
with U.S. equity mutual funds? The difference between global funds
and international funds is that global funds can invest in stocks
and bonds around the world including U.S securities, whereas
international funds invest similarly but not U.S securities.
Therefore, global funds are more likely to be correlated with U.S.
equity mutual funds, since a portion of their portfolios are likely
to be U.S. equities. An investor seeking increased international
diversification in a portfolio should consider international funds
over global funds or increase the portion of the portfolio devoted
to global funds if seeking diversification through global
funds.
