1. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-1 Chapter 24 Managing an International Investment Portfolio 24.1Vehicles for Overcoming Capital Flow Barriers 24.2Asset Allocation Policy and Managerial Style 24.3Cross-Border Financial Statement Analysis 24.4The Shifting Sands of Portfolio Analysis 24.5Portfolio Hedging Strategies 24.6Summary

2. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-2 Vehicles for overcoming capital flow barriers F Domestic-based MNCs F Individual foreign securities –Direct purchase in the foreign market –Direct purchase in the domestic market Foreign shares (e.g. American shares in the U.S.) Depository receipts (e.g. ADRs in the U.S.) –Mutual funds specializing in foreign securities Closed-end and open-end mutual funds Closed-end country funds F Hedge funds - private investment partnerships F Other international investment vehicles Equity-linked Eurobonds Stock index futures, options, and swaps

3. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-3 Closed-end country funds F Closed-end country funds invest in a single country’s stocks F CECFs trading on the NYSE include BrazilGermanyItalyIndia KoreaMexicoMalaysiaSouth Africa SpainSwitzerland TaiwanThailand United Kingdom F The CECFs of restricted markets can trade at substantial premiums or discounts to net asset value. »classic portfolio maximization »investor sentiment

4. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-4 Hedge funds F Hedge funds are private investment partnerships »a general manager and fewer than 100 limited partners »unregulated (as long as each partner passes SEC accreditation) F Hedge fund strategies include –arbitrage –emerging markets –market-neutral –opportunistic –short-selling –small-cap –special situations –value –yield-curve arbitrage

5. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-5 Portfolio management styles F Asset allocation policy –target weights on asset classes F Investment philosophy »Passive fund management –often benchmarked to an index »Active fund management –active asset allocation –active security selection

6. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-6 Cross-border financial statement analysis F Accounting systems influence statement analysis »Legalistic accounting systems –Emphasis is on the legal entity –Used in “code law” countries such as France and Germany –Accounting rules consist of “thou shalts” »Nonlegalistic accounting systems –Emphasis is on the economic entity –Used in “common law” countries such as the United Kingdom and the United States –Accounting rules consist of a list of “thou shalt nots”

7. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-7 Cross-border financial statement analysis F Differences in financial accounting measure are particularly prominent in accounting for »Goodwill »Discretionary reserves »Pension liabilities »Inflation accounting

8. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-8 F Responses to the need for financial information »Do nothing »Prepare convenience translations »Restate selected items »Prepare financial statements using another country’s accounting principles F There are notable international differences in financial disclosure requirements Cross-border financial statement analysis: International financial disclosure

9. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-9 Portfolio analysis F Inputs to portfolio analysis »E[RP] =  i X i E[R i ] »Var(RP) =  i X i 2  i 2 +  i  j X i X j  ij i  j F The shifting sands of portfolio analysis »Time-varying expected returns »Time-varying risk premiums »Time-varying volatilities »Time-varying correlations

10. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-10 60-month rolling correlations with the U.S. stock market

11. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-11 National markets during the international stock market crash of October 1987

12. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-12 Are Cross-Country Correlations Constant?  Longin & Solnik estimated national stock market correlations during periods of high and low market volatility assuming constant correlations  i,us between index i and the U.S. market. * *Francois Longin and Bruno Solnik, “Is the Correlation in International Equity Returns Constant?” Journal of International Money and Finance, No. 1, 1995.

13. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-13 Are Cross-Country Correlations Constant? F National stock market returns were modeled with autoregressive variances:  i,t 2 = a i + b i  i,t-1 2 + c i s i,t-1 2 where  i,t-1 2 =conditional variance from previous period s i,t-1 2 =square of return during previous period a i, b i, and c i are constants for stock market index i  Conditional covariance is  i,us:t =  i,us  i,t  us,t given conditional variances  i,t 2 and  us,t 2

14. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-14 Are Cross-Country Correlations Constant? Correlation with U.S. market CalmVolatileUnconditional Countryperiodsperiodscorrelation Canada0.7290.7530.723 France0.3310.5250.407 Germany0.3270.4610.353 Japan0.2650.3660.297 Switzerland0.4580.6500.508 U.K. 0.4680.5250.469

15. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 24-15 The benefits of currency risk hedging