PORTFOLIO SELECTION AND RISK MANAGEMENT: AN INTRODUCTION AND DEMONSTRATION OF GLOBAL DIVERSIFICATION BENEFITS

This paper serves as an introduction to portfolio selection and risk management and demonstrates benefits of global portfolio diversification. This work is based on Capital Asset Pricing Model and Markowitz Portfolio theory who won the Nobel Prize for his work.

Investors are always risk averse and choose the investment having low risk associated with it. For this, they diversify their portfolio globally by choosing those assets whose return is low or negatively correlated with their portfolio return. These differences in risk/return pattern of different countries are due to their unique fiscal policy, monitory policy, economic condition, business environment, political influence and economic growth. This paper analyzes the benefits of international diversification across countries for investor and their comparison with domestic portfolio as well as exchange rate effect on total portfolio return by looking at different research work done by different scholars. After studying this paper the reader will be aware of the importance of international portfolio diversification as well as additional gains that an investor gets from a properly global diversified portfolio.

We found that the benefits of global investment are large. Moreover, exchange rate and premium cost on global portfolio is neglecting.