Posted in Finance, Accounting and Economics Terms, Total Reads: 424
Definition: International Portfolio
When an investor builds up a portfolio consisting of investment assets in the forms of securities from foreign market rather than confining only to domestic market, then such a portfolio is known as international portfolio. Generally the investments are a sound option to diversify the risk and provide exposure to emerging new markets.
Capital Asset Pricing Model and the Modern Portfolio Theory always insists that individual and institutions should diversify their portfolio in order to bring down the risk. In this regard since the economic cycles and business cycle are different for different countries so having an international portfolio is an ideal method to reduce the risk in the portfolio. It is clear that with the advent of technology, emergence and development of multinational corporations, deregulation in the major industrial world, high growth of international capital flows and curbing down to foreign exchange controls have helped to improve the correlation among markets from different world.
However some people argue on the contrary that since such investments majorly take place in the emerging markets where there is a possibility of high growth, so more risk is involved. But statistical results shows that the risk is reduced if the correlation between foreign market and domestic market is less than 1.Lower the correlation ratio greater is the stability and lower is the risk of the portfolio.