Subject: Investment analysis and portfolio managementBook details :ISBN: XXXXXXXXXX Below points needs to cover :1) The investment Background2) Development in investment theory3) Valuation Principles...

Investment Analysis and Portfolio Management
International Portfolio Investment - Introduction
Investments
Investment can be defined as a commitment of dollars or any currency which is invested today to earns the returns in future period. Some of the factors which are considered while investing the funds are –
Time duration of the investment
Current Inflation rate and expected inflation rate
Risk associated with the investments ( risk can be systematic risks or unsystematic risks)
Return on the investment
Before making any investment decision, all the above factors play a very important role in the decision making process.
Investment Portfolio / Portfolio Management
Since many types of risks are involved while investing, it is very important to minimize those risks. The main aim of any investor is to maximize the returns and minimizing the risks associated. In order to reduce the unsystematic risk, since, systematic risk or the market risk cannot be reduced, therefore, portfolio management is an important concept. Portfolio can be defined as the combination of assets in which the investor invests. Portfolio comprises of investment in different types of asset classes and securities with different proportion.
It works as a great tool for diversifying the risk and maintaining the returns high. The major reasoning behind this is that when money is invested in different assets or securities then in the down period, all the sectors will not go down. If one sector goes down then the other sector might go up. This will help in minimizing the risks while keeping up the returns. Therefore the stock with negative correlation or low correlation are included in the portfolio.
International Portfolio Investment
International Portfolio Investment or Foreign Portfolio Investment is the investment in the assets or the securities which are held in foreign countries by the investors. It allows the investor to invest in other countries or we can say overseas investments. However, there is no direct ownership of the assets of the company. The portfolio may comprise of stocks, American Depository receipts (ADRs) or the global depository receipts (GDRs). Investors invest in International Portfolios to reap the benefits of the emerging economies, currency exchange rates, developed economies etc. The portfolio comprises of the stocks of the foreign companies, however, the risk of these investments can also be very high as there is economy risks and political instability.
Theories of International Portfolio Investment
Portfolio theories are used by the investors to minimize the risk in investments and maximize the returns.
Some of the theories of the portfolio investment are as follows:
· Dow Jones Theory
· Random Walk Theory
· Formula Theory
· Modern Portfolio Theory
Dow Jones Theory
This theory was given by Charles Dow who was the editor of the Wall Street Journal. According to this theory, the market moves in certain trend. This means that the market follows certain patterns and trends. These trends can be short term or long term which sways the market – up or down. They can also be day to day movement in the market. Therefore, according to this theory, the investor should study the trends and pattern in short and long run to make the investment decisions. This implies that the future results can be predicted based on past performance.
Random Walk Theory
This is contrary to the Dow Theory, according to this theory, one cannot predict the future outcomes and the market is completely unpredictable. This means that there is no correlation between the past performance and the future performance, the stock prices move randomly and cannot be predicted.
The assumption behind this theory is that all the investors have full access to the information and the information quickly gets adjusted in the prices. Since the stock price will reflect the information , therefore historical prices cannot be used to predict the future prices.
Formula Theory
This is a theory which was created to help the investors in minimizing the losses but it does not help in maximizing the returns. According to this theory, one can benefit from buying when the prices are low and sell when prices are high. To achieve the target, two portfolios are created – aggressive portfolio (Equity) and non - aggressive portfolio ( Debt ). The rules and the information are pre-determined. As per the price movement in the market, there is shifting of the funds from one portfolio to another to minimize the risk.
Modern Portfolio Theory
This theory was given by Harry Markowitz. According to this theory, the market is efficient which means that the prices of the assets reflect all the information and it is not possible to predict the future prices. This theory also assumes that any investor would want higher returns for higher risks. This is because they would like to get compensated for the risk they are taking on the investments. Therefore, we arrive at the concept of Efficient Portfolio. Efficient portfolios can be described as the portfolio which will give higher returns for higher risk. Therefore we keep on substituting the assets until we get the portfolio with least variance.
Benefits of International Portfolio Investment
There are various benefits of investing internationally or investment in International Portfolios. Some of the benefits are as follows:
Portfolio Diversification
By creating a portfolio which comprises of international investment one can gain benefits from the different economies across the world. Investing in different types of economies from emerging economies to developed economies, one can take advantage from the changing economic scenarios and minimize the risk. Global investments will ensure that the value of the entire portfolio does not go down at a same time. This is because if some economies would be down then others would be flourishing. Therefore, one can get a good mix of the different economies in their portfolio.
From the graph below, we can understand that as we diversify the portfolio, the risk associated with the international portfolio is the lowest. We see from the graph that the risk associated with international portfolio is lowest due to high diversification and risk with US stocks is higher than that. But on the other hand, the portfolio risk of the swiss stocks is the highest due to high volatility in the market. Thus, we International portfolio investment can help in diversification benefits and help in reducing risk.
Liquidity
The foreign Portfolio Investments are considered to be of higher liquidity. This means that they can be quickly converted into cash on demand. This attracts investor attention because they get the ready flow of cash stream. Therefore the investors with international portfolio will have higher liquidity as they can sell the assets and easily convert them into the cash.
More number of choices and options to include in portfolio
Investing abroad would give large no of options and choices to be included in the portfolio. Investing in country limits the investor in terms of options available to include in the portfolio, but investing in international economies will help to get large portfolio with higher diversification option. Some of the popular choices of the investors are Exchange Traded Funds (ETFs), American Depository Receipts (ADRs) etc.
"The group of foreign funds is a very diverse bin. You'll consider crop funds, industrial funds and what's not on the catalogue of schemes. It is still easier, though, to have a diversified system. Preferably, a US-specific scheme is good for Indian mutual fund investors. Betting on stronger economies is the safest and best way to...