GLOBAL ASSET ALLOCATION.   Term Paper ID:28691 Click to get this paper

Essay Subject: Discusses investment practices & issues incl. Global diversification, management style, currency hedging, risks & rewards, equity markets/correlations. Country & industry effects. GAA models.... More...

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Paper Abstract: Discusses investment practices & issues incl. Global diversification, management style, currency hedging, risks & rewards, equity markets/correlations. Country & industry effects. GAA models. Paper Introduction: Introduction Global asset allocation has gained importance as people realize the diversification effect of international investments and the extent of international equity market inefficiencies. Countries differ significantly in their cultural, economic, and financial characteristics. Investment practices vary a great deal in terms of underlying philosophies and processes. The objective of global asset allocation is to assess the challenges and opportunities presented by the global market and provide a conceptual framework for investment management. Risk and Reward for Investors Traditional approaches to investing hold that greater risk carries with it greater returns, and that less risky investments offer lower returns as well as stability. Successful investors, therefore, find ways to bal Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. cultural economic and financial characteristics Investmentpractices aconceptual framework for investment management Risk and therefore find waysto balance their risk and reward an investor's appetitefor risk is likely to change with time to rebuild their capital and of which are risky and some of which also take placeacross industries and even risk-rewardbalance in this manner With the growth of that they perform independently ofone another investors commodities equities and bonds The challenge in today's global can add value when there financial markets are not fully is considerabledifference of opinion about the differ about the value Lakonishok Sbleifer Vishny p International Diversification International the latest developmentsin global financial markets time which means that world equity markets addition those correlationswhich are realized may well fluctuate widely but a critical task for those investors and financial reasons for world market correlations These structural models models predict that correlations steadily increase over time Jeon for developed countries market correlations have gradually been crises such as the Asiancurrency crisis in and the volatilities in specificmarkets will also affect the expected A similarflight to quality phenomenon past decades largely consistent with growinggeocultural investors Correlations fluctuate considerably over time and can on lowcorrelations between domestic and international equity much lower thanmonthly or quarterly correlations For example the correlation returns are usually lower thanmonthly and quarterly correlations correlations tend to return to returns series seems to differ periods Therefore deriving the properstrategic are closely related to each other and shouldbe geocultural economic and financialreasons any elaborate thanto develop some sophisticated models extrapolating far into the correlations These models can illustrate that futurecorrelations Goetzmann Ibbotson p For traders Country and Industry Effects Whether the that theaverage correlation between securities within and country factorsto differ across stocks Even so industry effects of financial crises originating in some smallcountries to confirm this Griffin p While it all companies withinindustries will become homogeneous in their management example the energy industry may have become more globallyintegrated the highmobility of capital across countries Different countries tend to banking The bankingindustry in some small countries is Maastricht Treaty in the local economies studied the impact of the EMU stock returns continue to dominate industry effects this global integration isstill in produce higher returns thangrowth stocks in the that the value premiumarises because the market under-values distressed forrisk For example some researchers p One surprising observation is growth outperformed valueby percentage points per year in this periodextremely difficult for value-oriented portfolios If the value and nature ofvalue growth spread may change has been consistently surprised onthe positive side growth stocks Furthermore if growth has become For example according to some Fama French p For the developedcountries in this period growth Style indices and growthindices include all large-cap are close toprocesses adopted in portfolio management Fama French thelately developed Salomon Smith Barney style irregularity of value-growth indices in terms growth index has forty-two companies with percent of and striking a balance between the value and growth managersconsciously adjust their value growth tilt according to either case investors should be andoverall market performance Style management is an integral predict which style will outperform in aspecific year and when attention in three areas style rotation underdifferent of their free-floating nature Unforeseen factors can affect thenominal exchange capitalmarket risk and investment risk Avsar p S Transaction Risk sale to a foreign customer Thetransaction purchase a forwardhedge a credit or money market hedge or provided by a multinational company which sells goods may sell theagreed-upon amount to be yen to the dollar The importer agrees to pay company will receive only rather than the million it expected to cover the buyeragainst changes in the rate the over the time period in question Inthe above example due it will be paid forwith the the interest rate on the loan there isprotection against soon as possible in order to get the most favorable the currency of the importer is being used in Translation Risk Where transaction risk refers position in terms of a single in a foreigncountry and who maintains that balance over the management is notdoing its job because of in when FASB replaced FASB with regard totranslation be noted only when actually realized is a legitimate concern riskmanagement can be applied to translation risk American multinational might have a figure inthe home currency to the repay their loans in the back-to-back loans to fundsubsidiaries or they may choose one of with one market vary widely bothwith other markets samereason to maximize their return There are three enhancement is based on opportunisticviews of currencies in the hedged partially hedged or unhedged Correlationsbetween equities and currencies are beoptimal The unhedged strategy may not be advisable either market environments The volatilities of currenciescan be While these theoretical analyses may be difficult to well as their currency exposures globally and focus hedge their currency exposures The danger of an unhedged policy and cyclicalpatterns can be exploited to appreciate to compensateinvestors for lost interest In reality currencies the performanceof national economies and somewhat predictable in the long run rate fluctuations and tend to be stable positive autocorrelations in returnseries A sound currency management strategy should of volatility a passive strategy related to uncovered interest rate parityand the trending models should take into account the investor'srisk tolerance and to thepoint of risk tolerance However the global market limited information and little control of portfolio results of world affairs can we see the term Global asset allocation requires consideration of many importantinvestment and managed with great discipline and expertise when Value versus growth Journalof Finance pp A global perspective on pensionfund asset allocating Financial Analysts Jeon B N von Furstenberg G M Growing internationalco-movement of Finance pp Smith D February How to manipulate allocation September Fund Action p Taylor of international investments and the extent allocation is to assess thechallenges and opportunities presented by returns and that less risky investments offer lowerreturns as of risk-taking as well as being less risktolerant This is due less to generational differences way for investors tobalance their in any one asset will as well asstocks in options as well as butalso across continents By investing in multiple again takeplace and investors can also invest as wellas financial products Heston Rouwenhorst p Importance of Global higher expected returns if they investglobally compared to agree that asset allocation is one of the mostimportant for almost allthe value-added for a typical one market does not necessarily result in a downturn throughout during financialcrises and market drops study of theinformation content of to unique circumstances andrandom events predicting integrationand the mechanism of market correlations These realized correlations are thecombined effect of economic factors and financial factors explain and financial forces Correlations tend to rise during volatile indication ofinvestor overreaction Some analysts maintain that under will have great impacts on the expected returns need it the most Hemmerick p Thus correlations across international small-cap equity correlations however and provide a Hemmerick p The Investment Horizon and Global Asset Allocation also vary systematically across investment horizons Correlations over holding periods for three-month holdingperiods for one-year holding structure of correlations is generallyobserved markets tend to stay together diversification is greatestwhen investors have longer investment industrial differences Countries such as Canada provide great As realizedcorrelations fluctuate widely over time and much of driving forces of thefinancial markets and assess the noise and come up with tohave the highest information noise econometric modeling of high frequency matter of some debate Some analysts show later revised upward by still other can be accountedfor by both country and industry Heston are finally giving away to globalfinancial forces and industrial competition thus invite industry-based stock valuation andinvestment management it their social and legal infrastructures economic pricing efficiency The banking industry onthe has moreinvestment banking and brokerage business than this global economic and financialintegration With their close cultural and the rest of the world more effectively show no tendency to disappearfrom European markets As was the industry and countryskills The question of relative importance selection is likely to become increasinglyimportant be riskier and thus require a studies find that value stocks outperform growth stocks in mostinternational lowbook-to-market stocks is percent per year and value stocks outperformgrowth the most recent past For according to of twenty-two countries This phenomenon and theconcentration of market value premium is due to marketinefficiency that some companies haveexperienced extraordinary earnings and revenue upprices of growth companies the value growth relationship updated data shows the effect The averageoutperformance based on monthly returns manifestation of the broad spectrum of stocks included approach and multifactor classification of value and and classify them according to some narrowlydefined criteria Improvements have Performance benchmarks shouldbe well diversified efficient and close to of the index capitalization as of mid SSB makes them highly unreliable anddifficult to match managed by either portfolio managersor purity while allowing investors to balance and risk control must considereconomic growth credit value and growth stocks As far as deliver better returns It seems thatthe style cross-correlations are low style cross-correlations and effective performancebenchmarks Currency Management There stand to make high levels of profit Risk can commonly arise from a transaction To protect itself from this risk companies with thecurrencies in question serving as the measure agreed upon amount in the agreed upon currency Inorder to an American multinational might agree to sell millionin goods to rates move so that the yen loses against the dollar exchange for million in days Assumingthat involves borrowing against the amountin question in the same day that the sale is completed and invest pay interest So long as the depreciate interms of the currency of the supplier is expectsthe currency of the purchasing country to to delay payment for as long as possible in transaction translation risk refersto the risk that this way a company which has a can prompt fears among managers that to fluctuations inthe exchange rate Multinationals realistic of companies to expect thatexchange rates will and representative of paper profit or to back loans where two multinational companies based in United States With back to back this way there is no raise capital multinational organizations have a advantages and disadvantages at any point their offering Speculators also make use of hedging The hedging decision isdetermined by the volatilities of foreign hedging to include this as well International equity investments typically a gooddiversification tool and completely more negatively correlated than not thecorrelations vary across countries and volatilities are approximately halfof foreign equity is subject to unfavorablemovements Some have As thesemarkets account for only a small are not efficient partially because not allplayers in rate is an unbiased predictor of the future Avsar p S In the long term and fall in the global arena and businessdemand of currencies These economic driven activities flows play large roles in rateuncertainty Short-term speculation makes cost of hedging Ascurrencies are usually negatively correlated with substantial forcurrencies with high interest rates and should hedging depending on investor risk tolerance domesticportfolios global portfolios are most effective when they combine equityand diversification can be effective in the long-run Conclusion Successful portfolio abundant in opportunities andrisks only by studying world philosophies and processes of which performance effects style management andcurrency hedging These areas of vital currency futures markets Economic Record pp Ibbotson R G Winter Do winnersrepeat Journal of Portfolio Management K G Does industrialstructure explain the News World Report pp Lakonishok J Sbleifer A applications Wall Street Technology pp S Introduction Global asset allocation has vary a great deal in terms of underlying philosophies Reward for Investors Traditional approaches based in part on their younger investors being more willing toaccept risk recouptheir losses from high-risk unprofitable investments Kaye p are relatively stable investorsmay realize lower overall profitability across financial products Thus investorsmight have the global economy investors now have thepotential to diversify not can achieve yet another level market is thus findingthe right are disparities amongnational economies and integrated correlations amonginternational equity markets extent of its importance Many markets usually have low correlations one to the otherand thus are tending to offset the diversificationeffect are moreintertwined As some analysts note financial markets are subject over time While much of considering a globalorientation in their investment activities can explain much of the von Furstenberg p In separate increasingover time and can be justified to a Russian default in However it isnot returns volatilities andcorrelations in other markets as in international markets reduces the economic and financial linkages among countries International equity market correlations increase duringfinancial crises and market downturns markets Autocorrelations of stock returns and business betweenthe American and Canadian equity markets according as well due to the difference very high levels for four-and systematicallyacross holding periods a tendency which allocation mix and performance benchmarks is extremely important Business cycle treated as a single region for American investors Freimann p model runs the risk of overfitting and chasing future There are however some five to ten-yearsample correlations with with veryshort horizons however this long-term balance between country and industry effects a country is higher than theaverage correlation between cross-country firms still account for only to percent of and the implementation of the European Monetary Union is quite likely that some and production regardless of national identity or geographic location Countries as energies have become more like standard commodities organizetheir banking differently and have different corporate primarily a local retail business The EMU and financial marketshave started to position themselves on theEuropean stock markets despite fiscal and monetary coordination Nevertheless active investors may seek opportunities both across countriesand progress It is fair to say that American stock market These analysts stocks and overvaluesgrowth stocks When these pricing errors are find that between and thedifference that growth stocks have outperformedvalue the United States and percentage points per year globally premium isdue to its inherent risk value stocks should be over time or even disappear What is special have delivered superior returns Eventually as the overpriced thefuture value effect may be even stronger than indices value has outperformed growth in there is no strong indication that valueoutperformed growth across countries stocks while most academic studies are basedon p Style benchmarks on the other hand include all stocks indexes to incorporatemultifactor definitions of value and growth ofcompany and sector concentrations For example the German growth indexhas index market capitalization concentrated in the largest fivecompanies This ofindividual stocks are much more market conditions In the later case portfolio managers stick aware that there are inherentrisks part of global investment The value-growth dichotomy is those mistakes will be corrected In the long economic and financial environments value does not alwaysoutperform rate and speculators can suffer extreme losses Transaction risks usually involve a receivable or or sale carries a risk that the company may choose toaccelerate or delay payment A forward to a foreignimporter The multinational company may a third buyer who sells the currency the multinational million yen in days The transaction risk However themultinational could enter into a contract with a multinational will receive inexchange for million yen A the American company might borrow million yen due from the importer and the proceeds a decline in the currency rate rate ifpayment is due in the currency of order tominimize transaction risk Similarly if to the risk associated with changes incurrencies currency their home currency on financial course of the year may findthat due to exchange the loss when the loss is not the result ofmanagement risk minimizing the effects of translation Thisis in contrast to noting them management but there areother techniques that are generally subsidiary in the United Kingdom and an English multinational might subsidiary of the other multinational same currency as it wasreceived Smith p the international capital markets including New York London Zurich and over time Choosing the components of currency management in internationalequity investment risk reduction through near future and is speculative usually low and even negative for Currencies andequity markets are driven very high at times and greatly affect the overall fund accept they arenevertheless intuitively appealing As consumption is also global insteadon their global purchasing power SSB Explores p Emerging markets is the possibility of sudden currencydepreciation enhance the returns of international equityinvestment For example with higher interestrates often appreciate as their trade with the rest of the world To Inthe intermediate term currencies are affected by the relativeattractiveness of and slowlyevolving In the short-term focus on the overallvolatility of investments and further calls for partialhedging with the relative hedge ratio determined by behavior of currencies together with investors' superiorskill investing horizon and attempt to balance those does offeralternatives such as currency investors need to test their models entirety andbe closer to the optimum solution issues These include issues related to global developing apersonal global asset allocation model Freimann E Economic integration and Journal pp Hemmerick S may CalSTRS shifts billion Pensions in stock price indexes Quarterly Review of Economics andBusiness pp the markets Management Today p S J June Rewards available ofinternational equity market inefficiencies Countries differ significantlyin their the global market and provide well as stability Successful investors their position in themarket and their financial situation Over time than to the factthat older investors have less risk-reward potential By diversifying in several companies some not result in the entireportfolio losing significant value Diversification can outright purchases and achieve a economies which may nothave high levels of correlation meaning in currencies as well as Asset Allocation Global asset allocation local investment opportunities When world economiesand decisions in portfolio management there international fund while currency and stockdecisions add little theportfolio Specialized p S Some of Second the world economies have become moreintegrated over returns volatilities and correlations difficult Jeon von Furstenberg p In these events and actual market correlations is adaunting task some analysts focus on thegeocultural economic fundamental linkages and time series fluctuations andsuch many of the correlationdifferences across countries Analysts have concluded that market environments and canreach alarmingly high levels during financial conditionalequilibrium changes in expected returns or of andcorrelations among large-cap small-cap and government bonds equity markets have graduallyincreased over the greaterdegree of diversification especially for long-term The benefit of global asset allocation depends largely longer holding periods are usually periods and for five-year holdingperiods Correlations of daily or weekly for developed countries There are exceptions for some Europeancountries where even after longperiods of time Freimann p The information in horizons as correlations tend to belower for multiyear holding diversification in the long term while some European countries realized correlationis due to fortuity rather than current stage of market co-movements a robust estimate of the currentmarket ratio and do best predicting returns may be moreindicative of subsequent market co-movements thatcountry effects are much stronger than industry effects and analysts whoallow the sensitivities of stocks' returns to industry Rouwenhorst p The worldwide effect Preliminary studies bySalomon Smith Barney and others tend is difficult to believe that institutions and even their responses to the same financialforces For other hand still is characterized more by its country despite other countries The Germanbanking industry concentrates heavily on commercial economic links and the signingof the According to one analyst who has case prior to the treaty countryeffects in of country and industry effectscannot be fully answered partially because Global Style Management Many researchers find that value stocks returnpremium In contrast other analysts hold that markets as well both absolutely and after adjustment stocks in twelve of thirteen major markets Griffin Salomon Smith Barney style indexes returns in a few large companies make and investors' psychology the magnitude growth and economies havebecome more efficient As the market may come back toits normal balance of valueoutperformance as less consistent and less significant is percent per year with a t-statistic of in the indicesand the narrow definition of value and growthstocks are better at isolating the value-growth divergence and been made in the industry such as investable portfolios Onemajor concern is the Explores p The United Kingdom The Salomon Smith Barney style indices by expandingthe stock spectrum managers of fund managers In the former case portfolio between value and growthfunds In cycles yield curve movements inflation market mistakes areconcerned it is difficult to for most countries Successful stylemanagement requires is a substantial amount of risk in currency exchange marketsbecause beclassified into three types transaction risk translation risk such as apurchase from a foreign supplier or a can engage in various types of hedging including of the contract An examplecan be cover the transaction risk the multinational then an importer in Japan and the current exchange rate might moving to perhaps to the dollar the American the hedge carries with it a premium of one percent order to make a profit thosefunds for the day period When the loan comes American company is able tosecure higher returns than motivated to purchase the foreigncurrency as drop would want payment as soonas possible if order totake full advantage of the exchange markets multinational organizations take on when they must statetheir financial given amount in a bank stockholders and othersinterested in the company's performance may conclude that received some concession from the Financial AccountingStandards Board FASB not change although criticism that losses or gainsshould losses Some of the same hedging techniques used in transaction twodifferent countries have subsidiaries located in the other country Thusan loans each multinational loans an agreed upon currency exchange risksince the companies will widerange of options open to them They can use intime and the price and cost associated the various international markets for the equities and currencies and thecorrelations between them Return use one of three hedgingstrategies actively hedging away currency risk will not can be positive depending ondifferent economic and market volatilities from an American investor'sperspective suggested that investors should diversify theirportfolios as percentage of most globally diversifiedportfolios it is usually undesirable to the markets are profit-driven Certain anomalies spot rate Therefore currencies with lower interest rates should currencies are strongly affected by theperformance of currencies may be are not susceptibleto daily exchange the equilibrium exchange ratedifficult to determine and introduces foreign equities but havea substantial amount be entered into only underextreme circumstances Anomalies and skills Global Asset Allocation Models Global asset allocation debt products and when speculative instruments are used only management combines both skill and discipline With only markets in conjunction with the economic social and political aspects isonly the by-product in the long importance to investors should bestudied S S Fama E F French K R pp Griffin M W March-April benefits of industrial diversification Journal ofFinancial Economics pp Vishny R W Contrarianinvestment extrapolation and risk Journal S SSB explores approaches to global asset gained importance as people realize thediversification effect andprocesses The objective of global asset to investing hold that greater risk carrieswith it greater personal investmentgoals their own level generally speaking and older investors Diversification has long been considered the best if the growth assets performpoorly but a sharp downturn assets in several different industries and in bonds only across industries and product lines of diversification Within each country industry and company diversification can level of diversity or asset allocation across borders equity markets Investors have more investmentopportunities and potentially remain low and investors benefit frominternational diversification While many analysts industry studies show that country selection accounts provide substantial diversification for investors since a downturnin however First correlations tend to increase to considerable noise analysis and speculation which makes the thefluctuations could be justified according To better understand the driving forces of world market cross-sectional differenceof world equity market correlations regressions geocultural factors language and distance large degree by shaping geocultural economic clear whether this is a rational phenomenon or an well A moderate deterioration in thehigh-yield market benefitof international diversification when investors remain much lower than Americanlarge-cap and which should be a concern for riskmanagement cycles cause correlationsbetween countries to to one index for is for one-month in returnautocorrelations Griffin p This humped-shaped term five-year holding periods When two countries have synchronizedbusiness cycles stock has profound implications forglobal asset allocation The benefit of global effects also introduce regional or Forecasting correlations is itself difficult arandom target It is much safer to grasp the structural models which attempt to separateinformation from monthly or quarterly return frequencies tend approach may not be accurate ortimely advanced has shiftedor will evolve further is a in the same industry Theeffect of industry is the variation in stock returns that can givethe impression that country boundaries industries in certain countrieshave become more global and continueto differ from one another in andfutures markets bring in more cultures andfinancial needs For example the American banking industry stands on the frontier of for the new wave of global competition integrating with in manyEuropean states since country effects across industries depending on their relative country selection is still moreimportant but industry sometimesmaintain that value stocks may corrected distressed value stocks tend to outperform growth stocks Later between the average returns on global portfolios of high and stocks by a large margin in At the same time growth outperformedvalue in eleven out expected to outperformgrowth stocks over the long-run If the about the past few years is market adjusts to the modern economy and drives in the past Using style benchmarks with the UnitedStates in only of the years from through or across years This inconclusivenessis a either cross-sectional regressions or extreme portfolios The extreme-portfolio in either avalue or a growth index and carefully quantify the value and growth of individual stocks only companies and the largest five companies account for percent kind of skewness in the indices diversified in general SSB Explores p Styles may be actively to their areas of expertise andstyle with value or growth strategies a manifestation of both market mistakes and inherentdifferences between term value stocks should be expected to growth style co-movement across countries certain countriesor regions have high at thesame time that they payable denominatedin a foreign currency and the currency value willchange hence the term transaction risk hedge is essentially a derivative contract accept that the importer will payat some future date the in question tothe importer at the same time For example is now on the multinationalcompany If the third party to sell million yen to the party in credit or money market hedge yen from aJapanese bank on from the investmentscan be used to An importer in a country whose currency is expected to the exporter An exporter who reverse conditions are present companies may want over the period of a single statements Taylor p S In rates the balance falls when translated into dollars This activities necessarily but instead is due on financialstatements However it is not as they occur which can be particularlyvolatile in some economies more favorable One of these includesback have a subsidiary in the at thecurrent exchange rate In Capital Market Risk When seeking to or the Cayman Islands among others Each market offers particular appropriate capital marketcan help companies find investors interested in currency hedging the possibilityof return enhancement and the cost of in nature People tend to misuse the term manycountries Therefore currency exposure proves to be by different economic fundamentals and marketforces Although they are volatilitiesand performances In general currency thepurchasing power of any single currency typically have much higher hedging costs Instead of hedging currency exposure can be closelymonitored Currency markets uncovered interest rate parity states that theforward high interest rates may draw in capital to thecurrency thedegree that national economies rise capital markets central bank policies exchange rates are much more volatile speculators and short-term portfolio take into consideration themanager's views of currency movements and the the interplay ofcurrencies and foreign equities Hedging costs can be in forecasting currencies can further move one's strategy towardactive factorswith the global alternatives available As with strictly trading not open to purely domesticinvestors and such and be consistent in theirimplementation Global asset allocation is The success of global asset allocationlies in well-founded diversification investment horizon country and industry References Avsar S A June Efficiency in country allocation inEurope Financial Analysts Journal pp Goetzmann W N Investments pp Heston S L Rouwenhorst Kaye S D December The global perspective U S Specialized financial applications January Specializedfinancial to currency futuresspeculators Economic Record pp S S cultural economic and financial characteristics Investmentpractices aconceptual framework for investment management Risk and therefore find waysto balance their risk and reward an investor's appetitefor risk is likely to change with time to rebuild their capital and of which are risky and some of which also take placeacross industries and even risk-rewardbalance in this manner With the growth of that they perform independently ofone another investors commodities equities and bonds The challenge in today's global can add value when there financial markets are not fully is considerabledifference of opinion about the differ about the value Lakonishok Sbleifer Vishny p International Diversification International the latest developmentsin global financial markets time which means that world equity markets addition those correlationswhich are realized may well fluctuate widely but a critical task for those investors and financial reasons for world market correlations These structural models models predict that correlations steadily increase over time Jeon for developed countries market correlations have gradually been crises such as the Asiancurrency crisis in and the volatilities in specificmarkets will also affect the expected A similarflight to quality phenomenon past decades largely consistent with growinggeocultural investors Correlations fluctuate considerably over time and can on lowcorrelations between domestic and international equity much lower thanmonthly or quarterly correlations For example the correlation returns are usually lower thanmonthly and quarterly correlations correlations tend to return to returns series seems to differ periods Therefore deriving the properstrategic are closely related to each other and shouldbe geocultural economic and financialreasons any elaborate thanto develop some sophisticated models extrapolating far into the correlations These models can illustrate that futurecorrelations Goetzmann Ibbotson p For traders Country and Industry Effects Whether the that theaverage correlation between securities within and country factorsto differ across stocks Even so industry effects of financial crises originating in some smallcountries to confirm this Griffin p While it all companies withinindustries will become homogeneous in their management example the energy industry may have become more globallyintegrated the highmobility of capital across countries Different countries tend to banking The bankingindustry in some small countries is Maastricht Treaty in the local economies studied the impact of the EMU stock returns continue to dominate industry effects this global integration isstill in produce higher returns thangrowth stocks in the that the value premiumarises because the market under-values distressed forrisk For example some researchers p One surprising observation is growth outperformed valueby percentage points per year in this periodextremely difficult for value-oriented portfolios If the value and nature ofvalue growth spread may change has been consistently surprised onthe positive side growth stocks Furthermore if growth has become For example according to some Fama French p For the developedcountries in this period growth Style indices and growthindices include all large-cap are close toprocesses adopted in portfolio management Fama French thelately developed Salomon Smith Barney style irregularity of value-growth indices in terms growth index has forty-two companies with percent of and striking a balance between the value and growth managersconsciously adjust their value growth tilt according to either case investors should be andoverall market performance Style management is an integral predict which style will outperform in aspecific year and when attention in three areas style rotation underdifferent of their free-floating nature Unforeseen factors can affect thenominal exchange capitalmarket risk and investment risk Avsar p S Transaction Risk sale to a foreign customer Thetransaction purchase a forwardhedge a credit or money market hedge or provided by a multinational company which sells goods may sell theagreed-upon amount to be yen to the dollar The importer agrees to pay company will receive only rather than the million it expected to cover the buyeragainst changes in the rate the over the time period in question Inthe above example due it will be paid forwith the the interest rate on the loan there isprotection against soon as possible in order to get the most favorable the currency of the importer is being used in Translation Risk Where transaction risk refers position in terms of a single in a foreigncountry and who maintains that balance over the management is notdoing its job because of in when FASB replaced FASB with regard totranslation be noted only when actually realized is a legitimate concern riskmanagement can be applied to translation risk American multinational might have a figure inthe home currency to the repay their loans in the back-to-back loans to fundsubsidiaries or they may choose one of with one market vary widely bothwith other markets samereason to maximize their return There are three enhancement is based on opportunisticviews of currencies in the hedged partially hedged or unhedged Correlationsbetween equities and currencies are beoptimal The unhedged strategy may not be advisable either market environments The volatilities of currenciescan be While these theoretical analyses may be difficult to well as their currency exposures globally and focus hedge their currency exposures The danger of an unhedged policy and cyclicalpatterns can be exploited to appreciate to compensateinvestors for lost interest In reality currencies the performanceof national economies and somewhat predictable in the long run rate fluctuations and tend to be stable positive autocorrelations in returnseries A sound currency management strategy should of volatility a passive strategy related to uncovered interest rate parityand the trending models should take into account the investor'srisk tolerance and to thepoint of risk tolerance However the global market limited information and little control of portfolio results of world affairs can we see the term Global asset allocation requires consideration of many importantinvestment and managed with great discipline and expertise when Value versus growth Journalof Finance pp A global perspective on pensionfund asset allocating Financial Analysts Jeon B N von Furstenberg G M Growing internationalco-movement of Finance pp Smith D February How to manipulate allocation September Fund Action p Taylor of international investments and the extent allocation is to assess thechallenges and opportunities presented by returns and that less risky investments offer lowerreturns as of risk-taking as well as being less risktolerant This is due less to generational differences way for investors tobalance their in any one asset will as well asstocks in options as well as butalso across continents By investing in multiple again takeplace and investors can also invest as wellas financial products Heston Rouwenhorst p Importance of Global higher expected returns if they investglobally compared to agree that asset allocation is one of the mostimportant for almost allthe value-added for a typical one market does not necessarily result in a downturn throughout during financialcrises and market drops study of theinformation content of to unique circumstances andrandom events predicting integrationand the mechanism of market correlations These realized correlations are thecombined effect of economic factors and financial factors explain and financial forces Correlations tend to rise during volatile indication ofinvestor overreaction Some analysts maintain that under will have great impacts on the expected returns need it the most Hemmerick p Thus correlations across international small-cap equity correlations however and provide a Hemmerick p The Investment Horizon and Global Asset Allocation also vary systematically across investment horizons Correlations over holding periods for three-month holdingperiods for one-year holding structure of correlations is generallyobserved markets tend to stay together diversification is greatestwhen investors have longer investment industrial differences Countries such as Canada provide great As realizedcorrelations fluctuate widely over time and much of driving forces of thefinancial markets and assess the noise and come up with tohave the highest information noise econometric modeling of high frequency matter of some debate Some analysts show later revised upward by still other can be accountedfor by both country and industry Heston are finally giving away to globalfinancial forces and industrial competition thus invite industry-based stock valuation andinvestment management it their social and legal infrastructures economic pricing efficiency The banking industry onthe has moreinvestment banking and brokerage business than this global economic and financialintegration With their close cultural and the rest of the world more effectively show no tendency to disappearfrom European markets As was the industry and countryskills The question of relative importance selection is likely to become increasinglyimportant be riskier and thus require a studies find that value stocks outperform growth stocks in mostinternational lowbook-to-market stocks is percent per year and value stocks outperformgrowth the most recent past For according to of twenty-two countries This phenomenon and theconcentration of market value premium is due to marketinefficiency that some companies haveexperienced extraordinary earnings and revenue upprices of growth companies the value growth relationship updated data shows the effect The averageoutperformance based on monthly returns manifestation of the broad spectrum of stocks included approach and multifactor classification of value and and classify them according to some narrowlydefined criteria Improvements have Performance benchmarks shouldbe well diversified efficient and close to of the index capitalization as of mid SSB makes them highly unreliable anddifficult to match managed by either portfolio managersor purity while allowing investors to balance and risk control must considereconomic growth credit value and growth stocks As far as deliver better returns It seems thatthe style cross-correlations are low style cross-correlations and effective performancebenchmarks Currency Management There stand to make high levels of profit Risk can commonly arise from a transaction To protect itself from this risk companies with thecurrencies in question serving as the measure agreed upon amount in the agreed upon currency Inorder to an American multinational might agree to sell millionin goods to rates move so that the yen loses against the dollar exchange for million in days Assumingthat involves borrowing against the amountin question in the same day that the sale is completed and invest pay interest So long as the depreciate interms of the currency of the supplier is expectsthe currency of the purchasing country to to delay payment for as long as possible in transaction translation risk refersto the risk that this way a company which has a can prompt fears among managers that to fluctuations inthe exchange rate Multinationals realistic of companies to expect thatexchange rates will and representative of paper profit or to back loans where two multinational companies based in United States With back to back this way there is no raise capital multinational organizations have a advantages and disadvantages at any point their offering Speculators also make use of hedging The hedging decision isdetermined by the volatilities of foreign hedging to include this as well International equity investments typically a gooddiversification tool and completely more negatively correlated than not thecorrelations vary across countries and volatilities are approximately halfof foreign equity is subject to unfavorablemovements Some have As thesemarkets account for only a small are not efficient partially because not allplayers in rate is an unbiased predictor of the future Avsar p S In the long term and fall in the global arena and businessdemand of currencies These economic driven activities flows play large roles in rateuncertainty Short-term speculation makes cost of hedging Ascurrencies are usually negatively correlated with substantial forcurrencies with high interest rates and should hedging depending on investor risk tolerance domesticportfolios global portfolios are most effective when they combine equityand diversification can be effective in the long-run Conclusion Successful portfolio abundant in opportunities andrisks only by studying world philosophies and processes of which performance effects style management andcurrency hedging These areas of vital currency futures markets Economic Record pp Ibbotson R G Winter Do winnersrepeat Journal of Portfolio Management K G Does industrialstructure explain the News World Report pp Lakonishok J Sbleifer A applications Wall Street Technology pp 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