Internationally Diversified Investment Using an Integrated Portfolio Model

Hiroshi Konno and Jing Li
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Hiroshi Konno: Department of Industrial Engineering and Management, Tokyo Institute of Technology, 2-12-1 O-okoyama, Meguro-ku, Tokyo 152, Japan
Jing Li: Department of Industrial Engineering and Management, Tokyo Institute of Technology, 2-12-1 O-okoyama, Meguro-ku, Tokyo 152, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 1998, vol. 01, issue 01, 145-160

Abstract: In this paper, we use a new integrated portfolio model which takes care of stocks and bonds of several countries to construct an internationally diversified portfolio. This serves as an alternative to the popular asset allocation strategy, in which the fund is first allocated to indices corresponding to diverse asset classes and then allocated to individual assets using appropriate models for each asset class. Our model, on the other hand, determines the allocation of the fund to individual assets in one stage by solving a large scale mean-variance or mean-absolute deviation model. Another important feature of this article is a newly developed strategy for hedging the exchange rate risk by using forward contracts on currencies.Computational experiments using historical data collected in the capital market show that the new approach can serve as a more reliable and less expensive method for allocating the fund to diverse classes of assets.

Keywords: Asset allocation model; integrated stock-bond model; internationally diversified investment; mean-absolute-deviation model; portfolio analysis (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1142/S0219024998000072

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