The Relationship Between Potential Returns And The Underlying Risks

The goal of this case is to help Sandra Meyer develop a presentation to address Henry Bosse’s concerns about international investments. The general idea is to demonstrate to Henry the benefits of international diversification, if any. To achieve this goal, you need to have a view on 1) the impact of foreign exchange (FX) rates on the return and risk of international investments, and 2) the impact of having more assets on the return and risk of the investment portfolio To form views on these two points, answer the following questions: I. The impact of FX rates on the risk and return of foreign investments 1a) Using data in Appendix A, calculate the

Foreign exchange rate risk is also one of the main problem investing in emerging markets. Fluctuation often happens in emerging countries. Foreign investors could face losses because when they convert the currencies to their local currencies, they will not gain the profit that they expected. Therefore, currency fluctuations can impact the total return of investment. Meanwhile, developed countries usually have strong currencies. Which can also be a problem for foreign investor who happens to be from an emerging market to invest, since the product/service would be a lot more expensive than their local currencies.

2. Some risks that are common between domestic and international funds are: losing money and management risk. Any investment has some type of risk. Losing money is the first risk that every investment has whether it is domestic or international. Management risk is the bad management decisions that a company makes. Some unique risks that only international funding has are: economic risk, country/regional risk, and currency risk. Currency risk is the chance that the value of a   foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in the currency exchange rates. Economic risk is the stability of a country’s economic. Country/regional risk is political, financial troubles, and natural disasters that will affect the value of securities issued by companies in foreign countries or regions.

Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk

Risk and return are the fundamental basis upon which investors make their decision whether or not they should invest in a particular investment. How they are related and the influence between the two, is the decision making process that all investors must weigh up. This essay will show how risk can influence risk premium, outlining their relationship and how risk and return are related.

Internationally, the flow of capital across national borders and into markets once believed to be impregnable is occurring at the speed of light. Technological innovation, accessibility to international market economies, and increased globalization has expanded the universe of securities available for investments and more importantly portfolio diversification. The developments mentioned above questions traditionally accepted principles by investors who believed that investing solely in U.S. securities would result in a better risk-return tradeoff. Prudent investors have known that diversifying across industries and markets will lead to a given level of expected return at a significantly lower level of risk, and vice versa. However, the advantages of such diversification are limited due to the same cyclical economic fluctuations that all assets (or companies) in a particular country are exposed to.

Investing in emerging markets offer tempting advantages to investors. The volatile economies of countries considered to be in this category have a potential for extraordinary returns. A caveat to investors considering opportunities in emerging markets are the presence of unstable governments, the chance of nationalization, poor property rights protection, and large swings in prices. Emerging markets are far from a sure thing. But, despite high individual risk, emerging markets can reduce portfolio risk. The volatile economies of these countries have such low correlations compared to the domestic market that they actually provide the greatest degree of diversification.

 The holding period return (HPR)(보유기간수익률)  Depends on the increase (or decrease) in the price of the share over the investment period as well as on any

Whether it is investing, driving or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. (For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

Kallestrup et al (2013), evaluates how banking sector variables, such as cross-border exposure amplify the effect, that non-domestic sovereign has on domestic sovereign risk.

Developed economy investors are no doubt investing heavily in emerging market countries thanks to their promising profit. However, the questions they have to face is, whether investing in emerging market countries are risky or not? This question will be revealed by this research paper, which is based on facts gathered from reliable sources.

Risk has a role in individual’s lives around the world and that role can be influenced by an individual’s character and their daily life. Risk and return is affected by time when investing occurs. Time relates to the amount of time in the market which offers the highest chance of returns. The investment time frame will determine the amount of impact that investors will see, investment choices includes stocks and bonds (Kinicki, Cornett, Adair, Nofsinger, 2016).

Common Risk Factors in the Retu rns on Stocks and Bonds Eugene F. Fama Kenneth R. French Journal of Financial Economics 1993 Presenter: 周立軒 Brief Saying… • This paper identifies Five common risk factors in the return on stocks and bonds – Two stock market factors, two bond market factors , one market factor. – The five factors seems to explain all returns in stoc k market and bond market • Except the Low-Grade Bonds  Agenda • • • • • Introduction The Steps of the Experiment Data & Variables

Once the appropriate information has been collected and analysed, different forms of investment appraisal can be conducted. Here the client will be able to assess the viability of the investment proposal. There a number of different methods that can be used to do this. They include the; internal rate of return, net present value and payback period of the proposal (Horngren et al, 2012). These methods will assist the client in deciding if they should accept or reject the project.

In order to choose site for international business one of the critical exercises is evaluating country risk. These risks can be managed through hedging, insurance and different types of financial planning which will be discussed in the later section of this report.