Introduction Over the past decades, the benefits of international diversification have been extended to stock portfolios. Investors of international stock markets consider themselves enjoying the substantially higher return with less risk than investment in single market. Risk-averse investors tend to avoid risk and would rather invest in markets with fewer risks and a lower return than in markets with high risks but possibly better returns. Hong Kong, United Kingdom and Japan foreign stock markets are an example of international stock markets that investors can invest in, however, with adequate information on the respective market and their performances.
. Benefits of international stock market diversification in return investmentInvestors who choose to invest in a range of assets practice diversification and through that reduce the investment risks that they are exposed to. Diversification ensures improved returns and performance of assets in the markets. According to Fisher (2012) study, the results of the returns of hypothetical international collection indicated a higher performance compared to the domestic set. He states that, other than performance, Investing in countries with less cross border associations increases returns on investments and reduces the unpredictability with respect to total returns on investments in the long-term.
Diversification improves performance through risk adjustment and maintaining permanent weights. Diversification of international stock exchange allows investors to have a variety of assets to choose from and improve the ration of return to volatility. Acquisition of assets in different countries hedges against risk exposure since business cycles and economic growth levels in different countries vary. At this point, risk at the level of returns is reduced by the variation in performance of companies over long term periods.
Example of risk hedging through diversification is the 1990s’ incident of Janus and Templeton mutual fund companies. International markets are currently experiencing interdependence which is an added advantage to diversification (Burhan, 2007). Policies that govern International financial dealings are also improving and becoming more independent. For businesses, developing international relations also increases productivity through diversification of technology and other economies of scale. Evaluation of performance for Hong Kong, Japan and UK stock marketsBefore investing, it is appropriate to analyse the performance of the target markets and volatility of stock mutual fund or index in order to forecast and secure returns.
The performance of stock markets can be evaluated using standard deviation and Beta methods of evaluation. Standard deviation estimates risk exposures as a result of changing asset prices and therefore help in determining the most appropriate way of managing investment portfolio. It measures the Volatility of impossible risksStandard DeviationCountry Type of indexYearPerformance UKFTSE2010201120125899.945572.285897.81Hong KongHong Kong hang seng 20102011201223035.4518434.3922656.92JapanNikkei20102011201210638.6010228.9210395.18UK stock marketMean (UK) = (5899.94 + 5572.28 + 5897.81)/3 = 5790.01Deviations2010: 5899.94 - 5790.01= 109.932011: 5572.28 - 5790.01= -217.732012: 5897.81- 5790.01 = 107.80(109.94)2 + (-217.73)2 + (107.80)2 = 12086.
80 + 47406.35 + 11620.84 = 71113.99Deviation = 71113.99/3 = 23704.66Standard deviation (ơ) = √23704.66 Ơ = 153.96Hong Kong Stock Market Mean = (23035.45 + 18434.39 + 22656.92)/3 = 21375.59Deviations2010: 23035.45 - 21375.59 = 1659.862011: 18434.39 - 21375.59 = -2941.22012: 22656.92- 21375.59 = 1281.33(1659.86)2 + (-2941.2)2 + (1281.33)2 =2755135.22 + 8650657 + 1641806.57 = 13047598.79Deviation = 13047598.79/3 = 4349199.60Standard deviation (ơ) = √4349199.60Ơ = 2085.47Mean (Japan) = (10638.60 + 10228.92 + 10395.18)/3 = 10420.902010: 10638.60 – 10420.90= 217.72011: 10228.92 - 10420.90 = - 191.982012: 10395.18 - 10420.90 = -25.72(217.7)2 + (-191.98)2 + (-25.72)2 = 47393.29 + 36856 + 661.52 = 84910.81Deviation = 84910.81/3= 8.15Standard deviation (ơ) = √28303.60Ơ = 186.24A bigger standard deviation value indicates that the volatility or unpredictability of future prices is very high.
High level of uncertainty makes stock of the market more risk. UK stock market is the less risky market with a standard deviation of 153.96. However, this also involves less return compared to other markets with a higher standard deviation (risks). The Hong Kong Stock market happens to be the most risky market to invest in by both international and domestic investors.
It has a standard deviation of 2085.47, indicating the highest degree of unpredictability. Investors committing funds in such a market are completely unsure of price movements of stocks and therefore the committed investments will be risky such that, returns might be according to expectations or fail to recover the cost of capital of the investment (Yekim, 2006).