Portfolio Theory Applicated In The Foreign Exchange Market

As an international capital speculative market, the foreign exchange market which history is much shorter than stocks markets, gold markets and futures markets, developed rapidly at an amazing rate and has attracted a growing number of investors to join in. However, at present, the traders and investors of foreign exchange market are still mainly rely on fundamental analysis and technical analysis to make investment decisions. Fundamental analysis and technical analysis have a long history in foreign exchange trend analysis theory, the former was used to analyze the reasons of the movement in foreign exchange market, while the latter was used to analyze the effect of the market movements. Present-day, foreign exchange market have gone beyond the era of fixed exchange rate, to infer the price of foreign exchange rates by fundamental analysis and technical analysis should be too simple, investors can only take the price of the foreign exchange rate that derived from those theory as a reference. For the subjectivity and experience component of those analysis theory, the effect of investors'using process is poor.For these reasons, this article attempts to apply Markowitz mean–variance model to foreign exchange margin transactions, in order to improve investors'earnings and reduce their investment risk. First this article introduced the concepts and features related to foreign exchange and foreign exchange market. On this basis, by the comparision about the traditional methods of foreign exchange investment, fundamental analysis and technical analysis, then points out the limitations of these methods.The article mainly discussed the classic portfolio theory and the applicability of Markowitz mean-variance model for the foreign exchange margin transactions. Finally, this article has done the quantitative analysis for six straight plate and six cross plate which composed of seven world major currency, such as USD, JPY, EUR, GBP, AUD, CHF and CAD. Based on the closing price of each quarter between 1999 to 2008 of 12 different kinds of foreign exchange rate in the international foreign exchange market. by using of modern portfolio theory analysis the question about improving earning and risk prevention in foreign exchange margin trading. Empirical result shows that, after analysis by using the portfolio theory, the investment strategy with features that under the same earning rate, it's risk level is the minimum as well as under the same standard deviation, it's expected rate of return is the maximum. According to the risk and expected return of the portfolio that chosen by investors with different risk preferences, to calculate the reasonable margin proportion of investor's account can make full use of the investor's funds, at the same time, increasing profit. Portfolio Theory applicated in the foreign exchange market will make a change of the traditional foreign exchange investment management, so that the foreign exchange investment management will toward a systematic and scientific development increasingly.