International portfolio selection model with exchange rate risk

This paper discusses an international portfolio selection problem under fuzzy environment. Using the possibilistic theory, we first propose an general international portfolio selection model with exchange rate risk under the assumption that the values of unit investment in risky assets and exchange rates are fuzzy numbers. With this model, the investors can not only consider the foreign investment risk but also the domestic investment risk, which give the investors more selections in facing various risks. Furthermore, we deduce an equivalent model, when investment values of risk assets and exchange rates are triangular fuzzy numbers. Then, an numerical study is carried out with a portfolio of six assets denominated in the local currency. Based on the data, we obtain the portfolio frontier with exchange rate risk, and compare it with the portfolio frontier without domestic asset. The results illustrate the effectiveness of the proposed model.