Risk management for an internationally diversified portfolio
AbstractIn a simple framework where we have: (i) a stochastic domestic interest rate, (ii) a stochastic exchange rate, (iii) both a domestic and a foreign riskless asset, and (iv) both a domestic and a foreign risky asset, we explicitly compute the optimal asset allocation for an investor who wants to maximize the expected (CRRA) utility of his final wealth. This explicit solution allows us the widely investigate the behaviour of the optimal portfolio hedging component with respect to all the parameters in the model. In particular, we show a numerical simulation for investigating the hedging strategy against the exchange rate risk.
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Bibliographic InfoPaper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0404.
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Other versions of this item:
- Menoncin, Francesco, 2005. "Risk Management for an Internationally Diversified Portfolio," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 58(1), pages 9-41.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-05 (All new papers)
- NEP-FIN-2006-03-05 (Finance)
- NEP-FMK-2006-03-05 (Financial Markets)
- NEP-IFN-2006-03-05 (International Finance)
- NEP-RMG-2006-03-05 (Risk Management)
- NEP-UPT-2006-03-05 (Utility Models & Prospect Theory)
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