Applications of the integrated approach to international portfolio optimization

In a recent paper, we used a stock-bond integrated model to construct an internationally diversified portfolio using historical data of stocks and bonds of Japan and the U.S. The result of computational experiments using this integrated approach showed that it can serve as a more reliable and less expensive method than the traditional asset allocation strategy. In this paper, we present the results of subsequent experiments using the data of more than 700 stocks and bonds of six countries: U.S., U.K., Germany, France, Hong Kong, and Japan. In these experiments, we compared the direct historical data method and the beta pricing method in order to estimate the expected rate of return of assets. Another important feature is the use of a new strategy for hedging the exchange rate risk by using historical data to calculate the hedge rate on currencies. Computational experiments show a remarkable improvement over the results presented in [9]. Also, the result of the simulation shows that the beta pricing model leads to a better and more stable performance than the direct historical data method. © 2000 Kluwer Academic Publishers.