October 2011
Beginner
576 pages
16h 32m
English
Content preview from Equity Valuation and Portfolio ManagementBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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CHAPTER 16
Avoiding Unintended Country Bets in Global Equity Portfolios*
Michele Aghassi, Ph.D., CFA
Vice President AQR Capital Management
Cliff Asness, Ph.D.
Managing and Founding Principal AQR Capital Management
Oktay Kurbanov
Principal AQR Capital Management
Lars N. Nielsen
Principal AQR Capital Management
The diversification benefit of investing internationally has led to a significant shift in assets from domestic to global portfolios over time. However, investing internationally involves taking on risks that are not present when investing domestically. For example, a U.S.-based investor investing in a Japanese car manufacturer not only gains exposure to that specific stock but also to the overall Japanese market. The academic literature has extensively analyzed the relative importance of stock-specific risk, sector risk, and country risk for global stocks. Specifically, it is well documented that country risk is an important driver of individual stock returns, especially in emerging markets.1
In contrast, the literature has devoted less attention to the impact of country membership on actively managed stock portfolios. For instance, it is an open question whether ignoring country membership can yield negative side effects in portfolio construction. We address this question by showing that failing to explicitly control for country membership can lead to significant misallocation of risk. In particular, country bets can dominate a portfolio that aims to represent skill in selecting ...
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I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.