(Risk and Return Case Study)
Name : Quang Trung Dang
ID number : MA3N0205
Agenda
 Concepts
 Brief of Case Study
 Question
Concepts
 Correlation : A statistical measure of the relationship between any
two series of numbers representing data of any kind.
 Two series move in the same directions, they are positively
correlated
Return
Perfectly Positively
Correlated
N
M
Time
Concepts
 Two series move in the opposite directions, they are negatively
correlated.
Return
Perfectly negatively
correlated
N
M
Time
Concepts
 Two series lack any interaction and have a correlation coefficient
close to zero, they are uncorrelated.
• What is diversification ?
Diversification is a risk-management technique that mixes a wide
variety of investments within a portfolio in order to minimize the
impact that any one security will have on the overall performance of
the portfolio. Diversification lowers the risk of portfolio. There are
three main practices that can help to ensure the best diversification:
Concepts
 Spread portfolio among multiple investment vehicles such
as cash, stocks, bonds, mutual funds and perhaps even
some real estate.
 Vary the risk in securities. You're not restricted to choosing
only blue chip stocks. In fact, it would be wise to pick
investments with varied risk levels, this will ensure that
large losses are offset by other areas.
 Vary securities by industry. This will minimize the impact
of industry-specific risks.
Lotte Co., Ltd
Lotte Co., Ltd. is
a multinational
corporation with
headquarters in
South Korea and
Japan.
Lotte Group consists of over 60 business units in such diverse industries
Lotte Co., Ltd
Candy
Manufacturing
Retail
Beverages
Electronics
Fast Food
Hotel
Lotte Co., Ltd
Entertainment
Construction
Financial Services
Lotte's major operations are overseen in Japan and
South Korea, with additional businesses in China,
Vietnam, Thailand, Indonesia, USA, India, Russia,
Philippines and Poland.
Brief of Case Study
 Friskies cat food and Kit Kat are products of Nestle S.A.
(Switzerland )
 Aspirin is produced by Bayer AG, a German company.
 DirectTV is part of News Corporation, an Australian company.
 They are all products of non-US corporations and many U.S
corporations seek to have their products used internationally. The
result is a more globally integrated economy. One way to reduce
investment risk is through diversification. The benefit of
diversification between two assets increases if the two asset classes
are not well correlated and the benefit is largest when two asset
classes are perfectly negatively correlated.
Brief of Case Study
The increased correlation between the U.S assets and international
asset classes caused some to question the wisdom of international
diversification. Although investors were willing to accept less risk in
the form of less volatility of their portfolios, it was not easy to
recognize the benefits of diversification when the diversified
portfolio lagged a pure U.S. equity portfolio. The easiest way to
diversify a portfolio is to include an international or global mutual
fund in an investment portfolio.
Question
 International mutual funds do not include any domestic assets
whereas global mutual funds include both foreign and domestic
assets. How might this difference affect their correlation with U.S.
equity mutual funds?
The difference between global funds and international funds is that
global funds can invest in stocks and bonds around the world
including U.S securities, whereas international funds invest similarly
but not U.S securities. Therefore, global funds are more likely to be
correlated with U.S. equity mutual funds, since a portion of their
portfolios are likely to be U.S. equities. An investor seeking
increased international diversification in a portfolio should consider
international funds over global funds or increase the portion of the
portfolio devoted to global funds if seeking diversification through
global funds.
Thanks for Your
Listening!