Question

3. (Chapter 19) Consider three stock market indexes: the Dow Jones Industrial Average (DJIA), the S&P 500, and the Nikkei 225. Suppose you forecast that all three indices will have expected returns of 15% and annual standard deviations of 30%. You forecast that the DJIA and S&P 500 have 0.95 correlation, the DJIA and Nikkei 225 have 0.75 correlation, and the S&P 500 and Nikkei 225 have 0.75 correlation. Relative to holding only US stocks, could you improve your risk-adjusted returns by diversifying internationally? Why or why not?

          3. (Chapter 19) Consider three stock market indexes: the Dow Jones Industrial Average (DJIA), the S&P 500,
and the Nikkei 225. Suppose you forecast that all three indices will have expected returns of 15% and annual
standard deviations of 30%. You forecast that the DJIA and S&P 500 have 0.95 correlation, the DJIA and Nikkei
225 have 0.75 correlation, and the S&P 500 and Nikkei 225 have 0.75 correlation. Relative to holding only US
stocks, could you improve your risk-adjusted returns by diversifying internationally? Why or why not?

3. (Chapter 19) Consider three stock market indexes: the Dow Jones Industrial Average (DJIA), the S P 500,
and the Nikkei 225. Suppose you forecast that all three indices will have expected returns of 15% and annual
standard deviations of 30%. You forecast that the DJIA and S&P 500 have 0.95 correlation, the DJIA and Nikkei
225 have 0.75 correlation, and the S P 500 and Nikkei 225 have 0.75 correlation. Relative to holding only US
stocks, could you improve your risk-adjusted returns by diversifying internationally? Why or why not?

Added by Shawn J.

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