Abstract
We will propose a new method for constructing an optimal portfolio in which the fund is allocated to assets and currencies of several countries. Traditionally, two or three stage method is adopted in this field. However, it neglects the risk associated with variations of the rate of return of individual assets and the exchange rate of currencies. Instead, the new method enables one to simultaneously determine the optimal amount of fund to be allocated to each asset and the amount of the forward contracts on currencies. The resulting optimization problem is apparently a nonconvex minimization problem due to the existence of product terms in the objective function. We will show, however, that a globally optimal solution can be calculated by a standard algorithm in an efficient way. Also we will demonstrate that the new method leads to a substantially better result using historical data of U.S., Japan and Germany.
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Suzuki, KI., Konno, H. & Morjiri, M. An International Portfolio Optimization Model Hedged with Forward Currency Contracts. Asia-Pacific Financial Markets 4, 275–286 (1997). https://doi.org/10.1023/A:1009656805019
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DOI: https://doi.org/10.1023/A:1009656805019