Risk management in internationally diversified portfolio and its foreign exchange risk mitigation

Anna Vasylchenko

Master's thesis

Risk Management in Internationally Diversified Portfolio and Foreign Exchange Risk Mitigation

Abstract:

The main focus the submitted thesis “Risk Management in Internationally Diversified Portfolio and Foreign Exchange Risk Mitigation” is to analyze and determine the optimal structure of internationally diversified portfolio based on nine stock market indices during a specific period of time. For the purposes of this work, a US investor who is rational and risk-averse will be considered during the analytical part. The question as to how the investor could develop their portfolio to achieve most favorable mean-variance relationship will be intended to answer. The first section of the thesis presents specific risk factors of wealth diversification over different countries. The second section is dedicated to the motivation and background. The third and fourth sections represent Markowitz and Sharpe frameworks. The fifth part focuses on the solver agent. The sixths part describes selected market characteristics as well as specifics of each individual index. The final seventh section provides the analysis of risk, return, correlation, and Sharpe ratio of each specific index as well as the correlation of exchange rates. Once, these factors were computed, the respective optimal domestic portfolios were obtained. The following section also exhibits the ultimate internationally diversified portfolio.

Abstract:

The main focus the submitted thesis “Risk Management in Internationally Diversified Portfolio and Foreign Exchange Risk Mitigation” is to analyze and determine the optimal structure of internationally diversified portfolio based on nine stock market indices during a specific period of time. For the purposes of this work, a US investor who is rational and risk-averse will be considered during the analytical part. The question as to how the investor could develop their portfolio to achieve most favorable mean-variance relationship will be intended to answer. The first section of the thesis presents specific risk factors of wealth diversification over different countries. The second section is dedicated to the motivation and background. The third and fourth sections represent Markowitz and Sharpe frameworks. The fifth part focuses on the solver agent. The sixths part describes selected market characteristics as well as specifics of each individual index. The final seventh section provides the analysis of risk, return, correlation, and Sharpe ratio of each specific index as well as the correlation of exchange rates. Once, these factors were computed, the respective optimal domestic portfolios were obtained. The following section also exhibits the ultimate internationally diversified portfolio.

Keywords

International diversification, globalization, asset allocation, optimal portfolio, portfolio choice, exchange rate risk, volatility, rate of return, currency exposure, stock market index

Keywords

International diversification, globalization, volatility, optimal portfolio, portfolio choice, exchange rate risk, asset allocation, rate of return, currency exposure, stock market index

Language used: English

Date on which the thesis was submitted / produced: 19. 11. 2019

Thesis defence

• Date of defence: 10. 6. 2020
• Supervisor: Karel Brůna
• Reader: Ján Boháčik

Vysoká škola ekonomická v Praze

Master programme:
Finance and Accounting