ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

International Diversification A Tool To Hedge Against Portfolio Risk

Updated on August 7, 2014
Source

International diversification

 

Investors are always searching for methods or techniques to reduce the risk of their portfolio, and increase their returns. One method that has become successful is diversification. Diversification is choosing many stocks from different industries and sectors to protect the investor from factors that influence each industry or sector. The theory behind the diversification is that industry or sector specific factors will affect each stock within that industry or sector. An investor who has stocks diversified among industry can reduce the risk of these factors. International diversification is the same theory by using investments from other countries and markets.

The United States went through a financial crisis and the stock markets in the United States plunged to low levels. The crisis affected all stocks in the American markets. An investor who had investments in different markets around the world would not have been affected as much because of the international diversification. International diversification provides benefits for investors because of risk/return trade-off, international markets offer more opportunity, and investors can take advantage of the rapid growth in emerging markets.

Source

Hedging risk in the international markets

 

The risk/return tradeoff from international diversification is one of the most important benefits for implementing this strategy. The macroeconomic factors within a country can have a domino effect and influence each sector of business. The macroeconomic factors such as unemployment rates, interest-rates, inflation, policy changes, and increased taxes can cause negative effects on domestic businesses. An investor will want to hedge against the factors that could decrease the value of his or her portfolio. International diversification will provide the investor opportunities to hedge risk against domestic influences. Different business cycles exist in different regions of the world. An investor can have investments that include the various business cycles to generate returns in one area while the other area is decreasing.

Correlation is very important to the investor because negatively correlated stocks will move in opposite directions. If two stocks are negatively correlated then when one stock increases in value the other will decrease and vice versa. An investor who implements negative correlation in his or her portfolio will protect it from generating huge losses because as some assets are decreasing in value the other will be increasing. The diversification among assets should lead to less risk of the expected returns or higher expected returns for the same risk. Every investor should want to have higher return for the same level of risk he or she is currently taking.

Source

Opportunities in the international market place

 

International markets offer the investors more opportunity because the much larger selection of investments. International markets will provide a hedge against domestic macroeconomic factors that will drive value down in the domestic market. The United States market holds less than 50% of the market capital in the world. An investor who chooses to invest in domestic securities is only using less than half of the opportunities available. International markets provide the investor with opportunity to generate gains through growth of international economies. Many economies are implementing infrastructure, national resources, and raw materials to grow their economies. The investor will create gains through investing in these markets. Globalization has made the world a smaller place and made many countries interdependent upon each other. The growing globalization has allowed different countries to implement new technology and efficiencies to produce their resources. Developing these resources at a lower cost has made these economies profitable. The investor will want to invest in growing economies, and customers who many domestic companies have not reach yet. The international markets allow investors to create opportunities that domestic markets do not offer.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)