International Financial Management
FIN 4180
Spring 2018
Project 2
Domestic and Multinational Portfolios
Due: March 16, 2018
You may do this project individually or with up to two others. If you work with others, only one submission need be made but be sure the submission indicates all names.
This project compares the performance of a portfolio of domestic stocks to a portfolio that includes both domestic and foreign investments.
1a. Select eight US companies in different industries. Each company must have traded continuously for the last 10 years.
b. Obtain monthly stock prices for each US company for the last 10 years.
I recommend using the “adjusted closing price” from the historical price link at yahoo finance. It accounts for dividends and for stock splits. If you use another website’s historical prices or other measures of value, such as “opening price” or “closing price”, you should make appropriate adjustments for dividends, stock splits, and etc. yourself.
2a. Select four foreign companies, each from a different industry but from the same industry (or sector) as one of the US firms. Each foreign company must be from a different country. Each company must have traded continuously for the last 10 years.
(You may be able to identify foreign companies in the same industry by:
i. Searching for competitors of the US company and finding one that is foreign,
ii. identifying foreign companies that trade on NYSE or NASDAQ as American Depository Receipts at “adr.com”. Select “search DRs” under the “investors” menu, then scroll down to the “DR Search” box. Under “Exchange”, specify NYSE and/or NASDAQ. Then limit the search by “Country” and/or “Sector”.), or
iii. looking at a list of companies by industry.
b. Obtain monthly stock prices for each foreign company for the last 10 years.
(As with the US stock prices, I recommend using the “adjusted closing price” from the historical price link at yahoo finance. If you us another website’s historical prices or other measures of value, such as “opening price” or “closing price”, you should make appropriate adjustments for dividends, stock splits, and etc. yourself.)
If you obtain prices in a foreign currency rather than in dollars, you will need to adjust for the foreign currency denominated return to convert it into a dollar denominated return.
3. For each company, calculate:
a. the monthly returns for each month in the ten year period,
b, the average monthly return on each company’s stock and
c. the standard deviation of the ten years of monthly returns on each company’s stock.
4a. Create an eight stock US portfolio (equally weighted) consisting of the eight US companies.
For the US stock portfolio, calculate:
b. the monthly portfolio return each month in the ten year period,
c. the average monthly portfolio return for the ten year period and
d. the standard deviation of the ten years of monthly returns on the portfolio.
[Note that the standard deviation of monthly returns on the portfolio is not equal to the average of the companies’ standard deviations, nor is it the standard deviation of the companies’ average returns or the standard deviation of the standard deviation of the companies’ returns.]
5a. Create an eight stock global portfolio (equally weighted) with four US companies and the four foreign companies replacing the US companies from the same industries. For this portfolio, calculate
b. the monthly portfolio return each month in the ten year period,
c. the average monthly portfolio return for the ten year period and
d. the standard deviation of the ten years of monthly returns on the portfolio.
6. Contrast the risk of the US portfolio and the global portfolio. Explain the reason for your findings.
7a. Select a specific return that is between the return in 4c and the highest average return on any stock in the portfolio from question 5.
b. Use the solver in excel (or other optimization method) to determine the portion of funds invested in each stock in the portfolio from question 4 to provide the lowest risk with the return selected in part a.
8. Use the solver in excel (or other optimization method) to determine the portion of funds invested in each stock in the portfolio from question 5 to provide the lowest risk with the return selected in 7a.
9. Contrast the results for questions 7b and 8 and explain the reasons for your findings.