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    Tutorial - ACU081 - 5 - PORTFOLIO THEORIES TO MANAGE INTERNATIONAL DIVERSIFICATION

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    Tutorial - ACU081 - 5 - PORTFOLIO THEORIES TO MANAGE INTERNATIONAL DIVERSIFICATION

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    Tutorial

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    Tutorial_ACU081_5_PORTFOLIO THEORIES TO MANAGE INTERNATIONAL DIVERSIFICATION

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    Tutorial - ACU081 - 5 - PORTFOLIO THEORIES TO MANAGE INTERNATIONAL DIVERSIFICATION

    Uploaded by

    Frank Kapinga
    Tutorial

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    © All Rights Reserved
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    1 | Page

    THE INSTITUTE OF FINANCE MANAGEMENT

    INSTITUTE OF FINANCE MANAGEMENT CHUO CHA USIMAMIZI WA FEDHA

    BACC III, BBF III , BEF & BAIT III 2023 - 2024

    ACU 08103: BFU 08104 INTERNATIONAL FINANCE

    PORTFOLIO THEORIES TO MANAGE INTERNATIONAL


    DIVERSIFICATION
    TUTORIAL QUESTIONS
    _______________________________________________________________________________
    TQ1: [INTERNATIONAL PORTFOLIO RISK AND RETURN]
    Portfolio theory has played a crucial role in explaining the relationship between risk and return
    where more than one investment is held. With this regard discuss the capital market line (CML).

    TQ2: [INTERNATIONAL CAPM AND RISK]


    (1) Discuss the standard Capital Asset Pricing Model (CAPM), theoretically and graphically
    with its assumptions
    (2) Discuss the International Capital Asset Pricing Model (ICAPM) and how does it differ
    from the standard CAPM model.

    TQ3: [INTERNATIONAL PORTFOLIO RISK AND RETURN]


    A Tanzanian Portfolio Manager is considering the benefits of increasing his diversification by
    investing overseas. He can purchase shares in individual country funds with the following
    characteristics:

    Required:
    (i) What is the expected return and standard deviation of return of a portfolio with 25%
    invested in the Uganda and 75% in Tanzania?
    2 | Page

    (ii) What is the expected return and standard deviation of return of a portfolio with 25%
    invested in the Kenya and 75% in Tanzania?

    TQ4: [INTERNATIONAL PORTFOLIO RISK AND RETURN]


    A Tanzanian portfolio manager established an international equity portfolio by investing 60% of
    his funds in TATEPA shares and 40% of his funds in IBM shares. Returns on the shares
    over three years are as provided below:

    Returns from the two stocks are positively correlated (Correlation coefficient estimated at 0.9)
    Required:
    (i) Calculate the risk associated with investment in each of the individual capital markets.
    (ii) Based on the above information, calculate the risk and return of the proposed
    international portfolio.

    TQ5: [PORTFOLIO RISK AND RETURN]


    You are a Portfolio Manager working with a multinational company with a subsidiary in Dar es
    Salaam. Your Managing Director has provided you with the following returns in three different
    stock markets. A decision is to be made whether an equally invested portfolio should be formed
    constituting shares from the three markets. The shares can be purchased in individual country
    funds.

    It has been established that the returns from the three markets are not correlated. Your Managing
    Director has requested that you should compute the important key parameters of the proposed
    portfolio to assist him in making the investment decision.
    Required:
    (i) Calculate the risk associated with investment in each of the individual capital markets.
    (ii) Based on the above information, calculate the risk and return of the proposed
    international portfolio.
    (iii) State with reasons whether benefits of international portfolio diversification can
    be achieved in the above proposed international portfolio.
    3 | Page

    TQ6: [INTERNATIONAL CAPM AND RISK]


    Use the following data to answer the questions that follow.

    Required:
    (i) Calculate the foreign market betas relative to the Tanzania market.
    (ii) Calculate the risk of an internationally diversified portfolio that is equally invested in
    Tanzania and in each of the individual foreign country markets. State in each
    case whether the risk of the internationally diversified portfolio is considerably
    below or above the risk of the Tanzania portfolio.

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