ADMS 4501 Lecture Notes - Lecture 4: Efficient Frontier, Canadian Dollar, Foreign Exchange Spot
29 Apr 2017
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A na ve investment by an investor who resides in foreign country a might include only a small fraction of the portfolio invested in the home country, and a relatively greater weight invested in u. s. securities. This might not be an appropriate approach for a foreign investor who is likely to be comfortable with a home bias, just as american investors seem to be. Since this consumption basket includes health care, for example, as well as other substantial items that have no import component, the resultant desired weight in. U. s. securities will be smaller than market capitalization would suggest. Which of the returns is more relevant to an investor depends on whether the investor hedges the local currency. If the foreign exchange risk has been hedged, then the relevant figure is the stock market returns measured in the local currency. If the foreign exchange risk is not hedged, then the relevant returns are the dollar- denominated returns.
