Home-Country Bias and International Diversification - From an American investor’s perspective
(2021) NEKH02 20202Department of Economics
- Abstract
- Purpose: This thesis examines the home-country bias of the general U.S. investor and the possibilities for such an investor to diversify internationally. Moreover, it studies the optimal distribution between foreign holdings in emerging- and developed markets. The portfolio optimizations are considered through two investor profiles, one who aims to minimize her variance and one who seeks to maximize her risk-adjusted return.
Methodology: The purpose of this thesis is achieved through a comparison between several constructed portfolios. Firstly, a base portfolio is constructed based on the holding of the general American investor, which is then compared to six other portfolios with different holdings. Moreover, various portfolios are... (More) - Purpose: This thesis examines the home-country bias of the general U.S. investor and the possibilities for such an investor to diversify internationally. Moreover, it studies the optimal distribution between foreign holdings in emerging- and developed markets. The portfolio optimizations are considered through two investor profiles, one who aims to minimize her variance and one who seeks to maximize her risk-adjusted return.
Methodology: The purpose of this thesis is achieved through a comparison between several constructed portfolios. Firstly, a base portfolio is constructed based on the holding of the general American investor, which is then compared to six other portfolios with different holdings. Moreover, various portfolios are subject to different constraints and optimizations. Further, the portfolios’ performance is compared using two traditional performance measures and six alternative risk estimators. The traditional performance measurements include the Sharpe ratio and Treynor’s Index. Further, a new unconventional performance measure is introduced, the Sortino ratio. Thus, the risk-adjusted return is evaluated regarding three different risk-estimates, namely the standard deviation, the beta-coefficient and the lower partial standard deviation. Moreover, the portfolios’ value at risk, conditional value at risk, political risk, skewness and kurtosis are computed and used to highlight the traditional performance measures’ deficiencies.
Key findings: Conclusively, this thesis suggests that the general U.S. investor exhibits a home-country bias of approximately 80%. The reason for the suboptimal allocation can partly be described by behavioral biases and the exposure to new risks and costs that foreign investments bring. However, this study concludes that both of the examined investor profiles can improve their preferable performance measure when prioritizing foreign assets from emerging markets instead of holdings in other developed markets. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9036360
- author
- Österman, Ture LU and Bourghardt, William
- supervisor
- organization
- course
- NEKH02 20202
- year
- 2021
- type
- M2 - Bachelor Degree
- subject
- keywords
- International Diversification, Home-Country Bias, Portfolio Selection, Modern Portfolio Theory
- language
- English
- id
- 9036360
- date added to LUP
- 2021-03-11 11:58:10
- date last changed
- 2021-03-11 11:58:10
@misc{9036360,
abstract = {{Purpose: This thesis examines the home-country bias of the general U.S. investor and the possibilities for such an investor to diversify internationally. Moreover, it studies the optimal distribution between foreign holdings in emerging- and developed markets. The portfolio optimizations are considered through two investor profiles, one who aims to minimize her variance and one who seeks to maximize her risk-adjusted return.
Methodology: The purpose of this thesis is achieved through a comparison between several constructed portfolios. Firstly, a base portfolio is constructed based on the holding of the general American investor, which is then compared to six other portfolios with different holdings. Moreover, various portfolios are subject to different constraints and optimizations. Further, the portfolios’ performance is compared using two traditional performance measures and six alternative risk estimators. The traditional performance measurements include the Sharpe ratio and Treynor’s Index. Further, a new unconventional performance measure is introduced, the Sortino ratio. Thus, the risk-adjusted return is evaluated regarding three different risk-estimates, namely the standard deviation, the beta-coefficient and the lower partial standard deviation. Moreover, the portfolios’ value at risk, conditional value at risk, political risk, skewness and kurtosis are computed and used to highlight the traditional performance measures’ deficiencies.
Key findings: Conclusively, this thesis suggests that the general U.S. investor exhibits a home-country bias of approximately 80%. The reason for the suboptimal allocation can partly be described by behavioral biases and the exposure to new risks and costs that foreign investments bring. However, this study concludes that both of the examined investor profiles can improve their preferable performance measure when prioritizing foreign assets from emerging markets instead of holdings in other developed markets.}},
author = {{Österman, Ture and Bourghardt, William}},
language = {{eng}},
note = {{Student Paper}},
title = {{Home-Country Bias and International Diversification - From an American investor’s perspective}},
year = {{2021}},
}