International Investment Portfolio In Anticipation Of RMB Appreciation-From A Chinese Investor's Perspective

As their wealth has been increasing, the Chinese people whose vision has been broadened to overseas security markets now have a great investment demand which has been taken advantage of by banks and other institutional investors by providing a variety of financial products designed to invest overseas markets. However, with the continuous appreciation of RMB whose exchange rate system reform was launched in July 2005, the Chinese people have begun to doubt the necessity of overseas investment portfolio.This paper is organized in the following structure: first it reviews the portfolio theory advanced by H.Markowitz and the international portfolio theory, second it makes analyses of the differences of risk and return between two portfolios from September 2005 to August 2007: one is composed of SH A share index and the other is made up of ten country's main stock indices. Meanwhile, considering the similarity between the appreciation of Japan Yan in the 1980s and the appreciation of RMB over the past two years as well as their similar booming domestic stock markets in the respective periods, the paper also makes analyses of risk- return difference between the portfolio of Nikkei 225 Stock Index and the portfolio of other three countries' stock indices during the period of 1986 and 1995. Finally, the paper concludes from the results of these two analyses that international diversification benefits do exist in spite of the appreciation of domestic currency and therefore it is still necessary for the Chinese investors to allocate part of their investment to overseas markets for better risk-return balance.