International Investments

Directions: Answer all of the questions. Must be hand-written and show all of your work/ calculations. This is not a Google assignment. The assignment will be graded based on the standard of our textbook. (100 points)

Problem 1 is problem 22 in Chapter 12. (50 points)

A portfolio of $100 million is invested in European and Japanese stocks at the start of period 1. The country weights in the portfolio are 60 percent in Europe and 40 percent in Japan. At the end of period 1, the portfolio value went up to $110 million. To evaluate performance, the investor uses a composite benchmark made up of 50 percent of the European equity index and 50 percent of the Japanese equity index. All calculations are performed in base currency, the U.S. dollar, and indexes are total-return indexes (dividends are reinvested). Over period 1, the European index went up by 20 percent and the Japanese index gained 10 percent, so the international benchmark gained 15 percent. Detailed return data are given below. At the end of period 1, the country allocation was changed to 40 percent in Europe and 60 percent in Japan. At the end of period 2, the portfolio was up to $120.120 million, while the composite benchmark gained 29.375 percent over the two periods.

a) Attribute the performance to security selection and market allocation for each of the two short periods: period 1 and then period 2.

period (i.e., linked over the two short periods). PORTFOLIO BENCHMARK Rate of Return in Base Currency Rate of Return in Base Currency Country Component Country Weights Country Weights Period 1 Europe Japan Total Portfolio 0.60 0.40 100% 10.0% 10.0% 10.0% 50.0% 50.0% 20.0% 10.0% 15.0% 40.0% 60.0% 5.0% 12.0% 9.2000% 50.0% 50.0% 10.0% 15.0% 12.5% Period 2 Europe Japan Total Portfolio Compounded over entire period Europe Japan Total 15.5% 23.2% 20.120% 32.0% 26.5% 29.375% bliography period (i.e., linked over the two short periods). PORTFOLIO BENCHMARK Rate of Return in Base Currency Rate of Return in Base Currency Country Component Country Weights Country Weights Period 1 Europe Japan Total Portfolio 0.60 0.40 100% 10.0% 10.0% 10.0% 50.0% 50.0% 20.0% 10.0% 15.0% 40.0% 60.0% 5.0% 12.0% 9.2000% 50.0% 50.0% 10.0% 15.0% 12.5% Period 2 Europe Japan Total Portfolio Compounded over entire period Europe Japan Total 15.5% 23.2% 20.120% 32.0% 26.5% 29.375% bliography