Tài chính doanh nghiệp - Finance 407: Multinational financial management - Tài chính doanh nghiệp - Finance 407: Multinational financial management - Topic 18: Global investing

Topic #18: Global InvestingL. GattisThe Pennsylvania State UniversityFinance 407: Multinational Financial Management1Learning Objectives2Learning ObjectivesStudents understand and can recallThe effects of return improvement on long term investingStudents can computeReturn and volatility improvementPortfolio future values, present values, and annuitiesPoll3Suppose a global portfolio of assets has a standard deviation of 15% and expected return of 8%. The risk free rate of return is 3%. What level of return could I earn if I wanted to combine the risk free asset and the global portfolio to form a portfolio with a standard deviation of 7%?A. 3.5% B. 5.3% C. 8.2% D. 10.1% How much would I need to invest in the risk free asset?A. 53% B. 90% C. 32% D. 10% E. 47% Ri=Rf+SiσiSi=(Ri-Rf)/σiσRisky,Rf=wRiskyσRiskyDomestic v. Global Equity Portfolio4If I desired a 9% standard deviation, how much of a return improvement could I achieve by moving from domestic (D) to global (G) portfolio?If I desired a 5% mean annual return, how much of a volatility improvement (Global Portfolio Standard Deviation - Domestic Portfolio Standard Deviation) could I achieve by moving from domestic (D) to global (G) portfolio?Return Improvement (9% target vol)5rσ8%2%RfD18%9%GWhat return improve could you achieve if you desire a 9% volatility?rD= A. 3.92% B. 2.66%. C 4.12% rG= A. 4.2% B. 3.21% C. 3.92%Ret Improvement = rG – rD =If I have $100 to invest, how much do I allocate to G? (The rest would be invested in the risk free asset)WG= A. $60 B. $40 C. $49 D. $515%rD=rf+.24σDrG=rf+.38σG.5%ReturnImprovementReturn Improvement and Retirement6Suppose your annual retirement contribute is $15,000 for 40 years-- starting in one year. How much will you have at retirement if you invest in a domestic portfolio with an expected return of 4.34% or global portfolio with an expected return of 6.58%?Domestic: A. $1.5M, B. $1.8M, C. $2.5MGlobal: A. $2.2M, B. $2.7M, C. $3.5MAt retirement, you buy an annuity that makes annual payments for 30 years and earns 3.5%. What is the value of the annual retirement payment? (Hint: PV = Global portfolio Retirement balance, FV=0, compute payments)Global: A. $146K, B. $181K, C. $152KReturn Improvement and Retirement7What is the “real” value of the first payment in 41 years (in current dollars) if annual inflation is expected to be 2%?Global: A. $65K, B. $70, C. $75KWhat is the “real” value of the last payment in 71 years (in current dollars) if annual inflation is expected to be 2%? A. $22K, B. $27K C. $32K D. $36K E. $43KWhat decision will you make next summer that determines whether you die poor or rich?Volatility Improvement (5% targeted return)8r8%2%RfD18%GVolImprov.Capital allocation line (CAL)“Y=b+mX” / X = (Y-b)/mσD =(r*-rf)/SD=(.05-.005)/.24 = 18.75%σG =(r*-rf)/SG=(.05-.005)/.38 = 11.84%* = targeted returns (on CAL)Vol Improvement = 18.75-11.84=6.91%How do I construct this portfolio?.1184 = WG(.178); WG=.67; Wrf=.335%rD=rf+.24σDrG=rf+.38σG.5%18.7511.84σAnnual VaR (Value-at-Risk)9Annual VaR = -V(mean – Z (Standard Deviation))1-year 95% VaR for a $2M Portfolio at RetirementDomesticV = $2,000,000, mean = 5%, vol = 18.75% (from last slide)VaR = -2000000*(.05-1.65*.1875)=$518,7505% probability of losing $518,750 or moreGlobalV = $2,000,000, mean = 5%, vol = 11.84% (from last slide)VaR = -2000000*(.05-1.65*.1184)=$290,7205% probability of losing $290,720 or moreVolatility Improvement (2% expected return)10r8%2%RfD18%GVolImprov.What is the volatility improvement if I target a 2% expected return?σD = A. 5.75% B. 6.1% C. 6.25% D. 3.95%σG = A. 2.3% B. 3.95% C 5.0% C 4.12%Vol Improvement = How do I construct this Global portfolio?WG= A. 22% B. 78% C. 32% D. 68%5%rD=rf+.24σDrG=rf+.38σG.5%iClicker: Class EvaluationHow would you rate today’s class? Highest Lowest11Assigned Problems12 1. Assume that a global portfolio has an expected return of 8% and standard deviation of 16%. domestic portfolio has an expected return of 6% and standard deviation of 14%. The risk free rate of return is 1%. What is the global volatility improvement (reduction in standard deviation) if an investor desires a 4% expected return? What are the portfolio weights in the global portfolio and risk free asset to achieve the targeted expected return? Equation of Capital Allocation Line (connecting risky and Rf); SD = (Return – Rf)/ Sharpe(Of Risky Portfolio) SD(G, 4% Exp Return) = (.04-.01)/.4375=.06857; SD(D, 4% Exp Return) = (.04-.01)/.357=.08403; Vol Improve:=1.546% Weight(global) = .06857/.16= 42.9%; W(rf) = 57.1%1a. What is the 99%, 1-year, VaR of these two portfolios if the portfolio value $1,000,000? VaR(Dom)=-1000000*(.04-2.33*.08403)=$155,790 VaR(Global)=-1000000*(.04-2.33*.06857)=$119,7682. Suppose you plan to retire in 35 years and you will contribute $12,500 per year, starting in one year. You invest in a portfolio that has an expected return of 8.5%. What is the value of your portfolio at retirement (year 35)? What 30-year annuity (payments starting in year 36) could you buy at retirement if the funds can be invested at a rate of 4%? What is the real value of the first payment (in 36 years) if the annual inflation rate is expected to by 2.5%? FV(y=8.5%, n=35, pmt=12500)=2,408,771 PMT = (y=4%, n=30, p=2,408,771, fv=0)=$139,299 Real PMT = 139,299/1.025^36=$57,265