Afin818 Finance And Investment For Assessment Answer

1. Calculate stock market returns for the different countries, in both the local currency and in USD and the standard deviations of the average monthly returns.

2. Calculate the correlation coefficients between the different stock markets

3. Measure the performance of foreign equities relative to U.S. equities (based on EAFE and EM indices and the S&P 500 index

4. Decompose the relative performance of foreign equities into local equity returns and currency returns

5. Construct portfolios with different mixes of foreign and U.S. equities and identify efficient portfolios

Answers:

Report

From the evaluation overall return that is generated by international equities could be identified, which might help the pension fund to increase its return. In addition, the overall returns provided from international equities in local currency are relatively lower than US-equities. However, when converting the return of international equities in USD then it surpass the overall return from US-equities. Thus, it could be understood that pension fund might use the overall retunes that is provided from international equities to increase its overall return from investment (Blake 2014).

The major problems that might be faced by investors conducting trades in international equities are from standard deviation and risk involved in investment. In addition, the standard deviation of the return provided by international equities in USD mainly increases and raises the chance of incurring losses from investment. Thus, seeing the overall increase in risk of international equities, investment could be barred for reducing excessive loss from operations.

The overall exhibit 10 mainly depicts the relevant impact of exchange rate, which could reduce return from investment of international equities when converted in USD. In addition, the overall return in 2008 in local currency was higher than the USD converted returns. This mainly depicts the exchange rate risk, which hamper overall profitability of the investors investing in international equities (Raddatz and Schmukler 2013).

The correlation table depicted in excel sheet mainly portrays the relationship between the returns of overall international equities. In addition, the correlation table mainly portrays a positive valuation, which could be used by investor in drafting their portfolio. Portfolio managers mainly use the correlation able to diversify their exposure and reduce any kind of risk that is hindering their return from investment.

 After the overall evaluation of the international equities in local and USD currency, relevant assumptions could be identified, which is related to currency fluctuations. The currency fluctuations mainly, reflect the overall return that might change from investing in international equities (Inderst 2014).

References

Blake, D., 2014. Modelling Pension Fund Investment Behaviour (Routledge Revivals). Routledge.

Inderst, G., 2014. Pension fund investment in infrastructure: Lessons from Australia and Canada. Browser Download This Paper.

Raddatz, C. and Schmukler, S.L., 2013. Deconstructing herding: Evidence from pension fund investment behavior. Journal of Financial Services Research, 43(1), pp.99-126.