International Finance: Putting Theory Into Practice
19.2. THE SINGLE-COUNTRYCAPM 713 Figure 19.1:Combinations of risky stock portfoliosand asset 0 6 x 6 E( ̃rp) sd( ̃-rp) 0 r 0 ...
714 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL Figure 19.2:The risk-return bound with just risky assets 6 E( ̃rp) sd( ...
19.2. THE SINGLE-COUNTRYCAPM 715 Figure 19.3:Efficient Portfolios & the Tangency Portfolio 6 x 6 E( ̃rp) sd( ̃-rp) 0 r 0 ...
716 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL The first formula is pretty obvious. To interpret the second one, it h ...
19.2. THE SINGLE-COUNTRYCAPM 717 and var( ̃rp) = x^21 var( ̃r 1 ) + 2x 1 x 2 cov( ̃r 1 , ̃r 2 ) +x^22 var( ̃r 2 ); ⇒ ∂var( ̃rp) ...
718 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL (its contribution to the portfolio’s risk)—must be the same, see TekNo ...
19.2. THE SINGLE-COUNTRYCAPM 719 The portfolio in the example will be selected by an investor with relative risk aversion equal ...
720 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL a relation that comes in good stead to derive theCAPMin the next subse ...
19.2. THE SINGLE-COUNTRYCAPM 721 Thus, the rescaled risk (the asset’s relative risk, or market sensitivity) in Equation [19.24] ...
722 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL exact, we need theCAPMassumptions to justify why the expected return o ...
19.3. THE INTERNATIONALCAPM 723 North-American or European firm is likely to be different from the cost of capital to be used by ...
724 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL nonresidents.^9 All of this means that, in internationally integrated ...
19.3. THE INTERNATIONALCAPM 725 from various countries have different views on the distributions of real returns on any given as ...
726 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL Table 19.2:Exchange Rate Exposure: Good or Bad? Example 1: Example 2: ...
19.3. THE INTERNATIONALCAPM 727 19.3.3 Do Assets have a Clear Nationality? For a better understanding of the exchange rate covar ...
728 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL Figure 19.4:Relative exposures (γ) of various assets USD T-bill US exp ...
19.3. THE INTERNATIONALCAPM 729 19.3.4 The InternationalCAPM Let us again consider the two equations that determine the Canadian ...
730 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL weightxs), and weight 1 –xw–xsinvested in thecadrisk-free asset. Ifβj ...
19.3. THE INTERNATIONALCAPM 731 sign. Personally I would perhaps even entirely omit the exposure terms: given the uncertainties ...
732 CHAPTER 19. SETTING THE COST OF INTERNATIONAL CAPITAL that the French, Japanese, Korean, and Mexican markets are at least pa ...
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