International Portfolio Diversification - Essay Example

They are followed by the investment strategies pursued by three international funds. In this part, the steps that they make to highlight lucrative investment have been mentioned. Improving Returns International stocks have more chances to bring higher returns in comparison with the local stocks. Investors are considerably aware of the fact that international stocks have a wide variety of characteristics. The wide variety of characteristics is capable to increase portfolio performance by diversifying across different international markets or different industries in different countries.

In this regard, investing in the foreign or international markets offers difference when compared with the investment made in domestic or national market, and this difference can be comprehended in three ways. First, barriers levied by currency controls, taxation, or investor traditions may further so divide national markets that assets are priced in a national instead of an international landscape. Second, the co-variances among assets within a national market are much bigger than the co-variances among different markets.

Third, exchange rates between different currencies depart from each other, exposing currency to international portfolios (Gupta & Donleavy, 2009, p. 163). . If an investor invests 100 percent of his funds in a firm producing sunscreen lotion, he will be exposed to the risk of weather events; on rainy days there will be no sales of sunscreen lotion, but on sunny days sales will be good. If the same level of investment were divided with half in the sunscreen lotion firm and half in an umbrella manufacturing company, the investment would become immune to negative weather effects and the portfolio would generate interrupted flow of returns regardless of weather patterns.

The Optimal International Portfolio Diversification brings variety in investment. The optimal international portfolio combines the same risk-free assets as before (Eiteman et al., 2010, p.438). Eiteman et al. (2010) argue that the benefits of international diversification can be comprehended on the basis of the fact that the optimal international portfolio incorporates both higher expected portfolio return and lower expected portfolio risk when compared with the purely national or domestic optimal portfolio.

As a result, the optimal international portfolio has been established as superior and financially lucrative as compared to the optimal domestic portfolio. Global Funds Using International Portfolio Diversification Templeton Global Bond Fund The firm uses both quantitative and qualitative analysis before investing diversified funds globally (Templeton Global Bond Fund, 2012). The firm employs both quantitative and qualitative analysis along with on-the-ground research. In order to minimize the portfolio risk and increase the chances of portfolio returns, the firm utilizes the resources of local analysts across the world to identify and highlight financially