10 Jul DISCUSS RESTRICTIONS ON FOREIGN INVESTMENTS
PROJECT
Please prepare a report for a country of your choice. Your report should be 15 pages long including detailed analysis of exchange rate, country stock index and macroeconomic data. There will be two parts in your report: country analysis and investment analysis. In addition you should submit a 1 page summary with your overall recommendation. The summary should state whether you recommend or not to invest in a country stock index for the next five years. It should summarize the main reasons for your recommendation based on macroeconomic risks, past performance (risk-return tradeoff such as Sharpe ratio) and potential benefits for portfolio diversification.
Country Analysis
Macroeconomic trends and risks
Discuss Balance of Payments (Current Account surplus or deficit) , exchange rate, GDP growth, inflation, monetary policy, fiscal deficits/surpluses, yields on government bonds compared to the US T-bonds for the last 5-10 years. Macroeconomics data can be searched from the Central bank website of a country and from the IMF website among other sources. Exchange rate is available from the The Pacific Exchange Rate Service or from FRED database among other sources.
Is the country open to foreign investments? Discuss restrictions on foreign investments, capital controls, political environment and any other risks of investment in the country.
Investment Analysis
Find the monthly data on the country’s major stock index (see MSCI Barra or other source). Show the country stock index return in local (foreign) currency and in USD . Note the conversion from the return in local currency into the USD using % change in exchange rate
Look at the performance for the last 10-20 years of the country return in dollars relative to the MSCI world index return (ACWI) and the USA index return. For the USA index use either MSCI index for USA or SP500 index. The data for the ACWI index and the USA index can be obtained from MSCI Barra website. The SP500 index data are available e.g. from Yahoo Finance.
Report the mean, standard deviation and the Sharpe ratio for the country return in dollars r($), USA index return and ACWI. Compare and discuss them. (Note: The T-bill (4 weeks or 3 months) can be used as a risk-free asset and data are available from the FRED website.)
Find the correlation between the country stock index return and the USA index return. Would it be beneficial from the point of view of international portfolio diversification to invest in this country for an investor holding only the USA index portfolio?
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