1) Theory of Markowitz

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework

for assembling a portfolio of assets such that the expected return is maximized for a given
level of risk, defined as variance. Its key insight is that an asset's risk and return should not
be assessed by itself, but by how it contributes to a portfolio's overall risk and return.
Economist Harry Markowitz introduced MPT in a 1952 essay,[1] for which he was later
awarded a Nobel Prize in economics

2) Foreign direct investment (FDI) is made into a business or a sector by an individual or a

company from another country. It is different from portfolio investment, which is made more
indirectly into another countrys economy by using financial instruments, such as bonds and
stocks.

List of Advantages of Foreign Direct Investment

1. Economic Development Stimulation.

Foreign direct investment can stimulate the target countrys economic development,
creating a more conducive environment for you as the investor and benefits for the
local industry.
2. Easy International Trade.
Commonly, a country has its own import tariff, and this is one of the reasons why
trading with it is quite difficult. Also, there are industries that usually require their
presence in the international markets to ensure their sales and goals will be
completely met. With FDI, all these will be made easier.
3. Employment and Economic Boost.
Foreign direct investment creates new jobs, as investors build new companies in the
target country, create new opportunities. This leads to an increase in income and
more buying power to the people, which in turn leads to an economic boost.
4. Development of Human Capital Resources.
One big advantage brought about by FDI is the development of human capital
resources, which is also often understated as it is not immediately apparent. Human
capital is the competence and knowledge of those able to perform labor, more known
to us as the workforce. The attributes gained by training and sharing experience

would increase the education and overall human capital of a country. Its resource is
not a tangible asset that is owned by companies, but instead something that is on
loan. With this in mind, a country with FDI can benefit greatly by developing its
human resources while maintaining ownership.
5. Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional
expertise, technology and products. As the foreign investor, you can receive tax
incentives that will be highly useful in your selected field of business.
6. Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of
knowledge, where various countries are given access to new technologies and skills.
7. Reduced Disparity Between Revenues and Costs.
Foreign direct investment can reduce the disparity between revenues and costs. With
such, countries will be able to make sure that production costs will be the same and
can be sold easily.

List of Disadvantages of Foreign Direct Investment

1. Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investors home country, foreign
direct investment can sometimes hinder domestic investment.
2. Risk from Political Changes.
Because political issues in other countries can instantly change, foreign direct
investment is very risky. Plus, most of the risk factors that you are going to
experience are extremely high.
3. Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates to the advantage
of one country and the detriment of another.
4. Higher Costs.
If you invest in some foreign countries, you might notice that it is more expensive
than when you export goods. So, it is very imperative to prepare sufficient money to
set up your operations.
5. Economic Non-Viability.
Considering that foreign direct investments may be capital-intensive from the point of
view of the investor, it can sometimes be very risky or economically non-viable.
6. Expropriation.
Remember that political changes can also lead to expropriation, which is a scenario
where the government will have control over your property and assets.

7. Negative Impact on the Countrys Investment.

The rules that govern foreign exchange rates and direct investments might negatively
have an impact on the investing country. Investment may be banned in some foreign
markets, which means that it is impossible to pursue an inviting opportunity.
8. Modern-Day Economic Colonialism.
Many third-world countries, or at least those with history of colonialism, worry that
foreign direct investment would result in some kind
3)

4)

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6)

Two main risk sources need be considered when investing in a foreign country:
Economic risk: This risk refers to a country's ability to pay back its debts.
A country with stable finances and a stronger economy should provide
more reliable investments than a country with weaker finances or an
unsound economy.
Political risk: This risk refers to the political decisions made within a
country that might result in an unanticipated loss to investors. While
economic risk is often referred to as a country's ability to pay back its
debts, political risk is sometimes referred to as the willingness of a
country to pay debts or maintain a hospitable climate for outside
investment. Even if a country's economy is strong, if the political climate
is unfriendly (or becomes unfriendly) to outside investors, the country
may not be a good candidate for investment.

Analyzing Mutual Fund

Risk
7)

By Arturo Neto

There are a number of attractive mutual funds and fund managers that have
performed very well over both long-term and short-term horizons. Sometimes,
performance can be attributable to a mutual fund manager's superior stockpicking abilities and/or asset allocation decisions. In this article, we'll
summarize how to analyze a mutual fund's portfolio and determine whether
there are specific performance drivers. (To learn more, see Choose A Fund
With A Winning Manager.)
TUTORIAL: Mutual Funds
Portfolio Analysis
All mutual funds have a stated investment mandate that specifies whether the
fund will invest in large companies or small companies, and whether those
companies exhibit growth or valuecharacteristics. It is assumed that the mutual
fund manager will adhere to the stated investment objective. It's a good start to
understand the fund's specific investment mandate, but there is more to fund
performance that can only be revealed by digging a bit deeper into the
fund's portfolio over time.
Sector Weights
Sometimes fund managers will gravitate towards certain sectors either

because they have deeper experience within those sectors, or the

characteristics they look for in companies force them into certain industries. A
reliance on a particular sector may leave a manager with limited possibilities if
they have not broadened their investment net.(To learn more, read Words
From The Wise On Active Management.)
To determine a fund's sector weight, we must either use analytical software or
sources like Yahoo or MSN. Regardless of how the information is obtained, the
investor must compare the fund to its relevant indexes to determine where the
fund manager increased or decreased their allocation to specific sectors
relative to the index. This analysis will shed light on the manager's
over/underexposure to specific indexes (relative to the index) in order to gain
additional insight on the fund manager's tendencies or performance drivers.
The analysis can be as simple as listing the fund and relevant indexes side by
side with a breakdown by sector. For example, for a large cap manager, the
simplest way to determine sector reliance is to place the fund's sector
breakdown next to both the S&P 500 Growth Index and the S&P 500 Value
Index. Both of these indexes exhibit unique sector breakdowns because
certain sectors routinely fall into the value category, while others fall into the
growth category. Technology, known more as a growth sector, will have a
higher weight in the S&P Growth Index than in the S&P 500 Value Index.
Industrials, on the other hand, known as a value sector, will have a higher
weight in the S&P 500 Value Index than in the S&P 500 Growth Index. A
comparison of the fund relative to the sector breakdown of these two indexes
will indicate whether the fund is in line with its stated mandate and reveal any
over or under allocations to a specific sector. (For more insight,
read Benchmark Your Returns With Indexes.)
The key to this analysis is to perform it on both current as well as historical
data in order to identify any tendencies the fund manager may have. (To learn
more, read Shifting Focus To Sector Allocation.)
Attribution Analysis
There are fund managers who claim to have a top-down approach and others
that claim to have a bottom-up approach to stock-picking. Top-down indicates
that a fund manager evaluates the economic environment to identify
global trends and then determines which regions or sectors will benefit from

these trends. The fund manager will then look for specific companies within
those regions or sectors that are attractive. (To learn more, read Build A Model
Portfolio With Style Investing.)
A bottom-up approach, on the other hand, ignores, for the most
part, macroeconomic factors when searching for companies to invest in. A
manager that employs a bottom-up methodology will filter the entire universe of
companies based on certain criteria, such as valuation, earnings, size, growth
or a variety of combinations of these types of factors. They then perform
rigorous due diligence on the companies that pass through each phase of the
filtering process.
In order to determine whether a fund manager is actually adding any value to
performance based on asset allocation or stock picking, an investor needs to
complete an attribution analysis that determines a fund's performance driven
by asset allocation versus performance driven by stock selection. Attribution
analysis, for example, can reveal that a manager has placed incorrect bets on
sectors but has picked the best stocks within each sector. Using this example,
this manager should have a bottom-up approach. If the manager's mandate
describes a top-down methodology, this might be a cause for concern because
we've discovered that the fund manager has done a poor job of asset
allocation (top-down).
Let's look at a five-sector portfolio as an example:
In the tables below, we compare a mutual fund portfolio with its
relevant benchmark and identify how much of the portfolio's performance was
attributable to asset allocation (sector weights) versus how much was
attributable to superior stock picking.