| The thesis estimates the benefits of international portfolio diversification using an 'active' portfolio management policy. Such a policy was desirable on two counts. First, the expected returns and/or the variance-covariances of international asset returns were found to be non-stationary. In active portfolio management, it is possible to 'internalize' the non-stationarity of the stochastic process generating the data. Second, the international capital market was found to be inefficient by some earlier studies. In such a market, there exists super risk-premium which may be obtained through active management strategy.;The average returns of the actively managed portfolios over the period were then compared to those of some 'passive' buy-and-hold portfolios after allowing for some arbitrarily selected transaction costs. It was seen that the actively managed portfolios outperformed the buy-and-hold portfolio for almost all the holding period cases. This result supports the 'partial' segmentation view of the international capital market and its consequent inefficiency.;Incorporating Pratt-Arrow measure of relative risk-aversion in the expected utility function, the effect of investor's risk tolerance on portfolio risk and return was explored. It was seen that between two classes of risk-averse investors, the more risk-averse class earned less risk-adjusted return on average than their less risk-averse counterparts.;Finally, the effect of the exchange factor on portfolio risk and return was analysed. Under the fixed exchange rates system, rate changes led to a reduction of portfolio variance for some periods while under the flexible rates system variance rose. Effects on portfolio return were mixed; however, on average, they contributed positively. The exchange factor also affected portfolio choice--a result contradicting the view held by proponents of the PPP theory of exchange rate determination. (Abstract shortened with permission of author.);Using ex ante data, the additional benefits of 'international' over 'domestic' diversification was demonstrated by comparing the risk-return characteristics of some 'international' portfolios with those of a domestic benchmark portfolio. The portfolio selection model used throughout was the single-period Markowitz Mean-Variance model. Several portfolio strategies were investigated and it was seen that for a representative U.S. investor there were significant additional gains to be enjoyed from holding internationally diversified portfolio rather than the domestic portfolio. |
