Investment Strategies (PDF)

Inhaltsangabe:This thesis explains the methodology of the considered investment strategies and demonstrates gradually how they are implemented. Besides the ebook, the purchaser of this article receives also the underlying excel sheets. These excel sheets show without using macros how step-by-step the different strategies are implemented.

Introduction:
Nowadays the merits of international portfolio diversification are widely acknowledged in the academic literature. The risk reduction of an international portfolio can be achieved because the correlations between international asset markets are rather low compared to a portfolio which entirely consists of national securities. Hence, international investment strategies are superior compared to strategies which invest solely in a local market since they are able to generate a greater return for a certain risk, or less risk for a given return.
Beside the advantages of international diversification, the investment in other currencies bears an additional uncertainty that arises through foreign exchange rate fluctuations. However, the development of the exchange rate is not solely a one-sided downside risk; it is also a chance of a higher return since the movement can be in favor of a position. In other words, exchange rate changes have different effects on investors of different currencies. Even if the domestic return is much lower than in other countries, it might be the case that an investment in another state will result in a lower return because of the exchange rate development. Therefore, the residence and the therewith-associated currency of an investor is crucial for the result of an international diversified portfolio.
In order to analyze the two risk drivers of an international diversified portfolio separately, the results of the investment strategies are calculated in two ways - with and without the exchange rate development. This method allows evaluating whether exchange rate movements are dispensable or if currency fluctuations are significant for international equity portfolios and therefore the exchange rate risk should be hedged.
The choice of the investment strategy should be compatible with the needs, the expectations and the personality of an investor. In many papers utility theory is used to determine an investor¿s optimal investment strategy. These approaches use utility functions to figure out which strategy fits best to an investor. The methodology of this paper is from another [...]