(The) attractiveness of Korean securities to international investors

Abstract

This thesis presents empirical comparison of the returns from Korean security holding with the returns from security holdings of different countries, namely, United States, United Kingdom, W. Germany, France, Japan, Canada, Holland, Australia and Hong Kong. Average dividend of Korean securities is the highest of all and monthly average return for the period Jan. 1980 - Dec. 1981 is the highest except that of Hong Kong securities. Moreover, the correlation between Korean securities and foreign securities is much lower than the intercountry correlations among other countries. However, the variability of return measured in terms of standard deviation is also relatively high. The affects of sharply fluctuating changes in exchange rates on returns and covariance structure of returns is examined, of which the magnitude and direction is depending on the country from which international investors are or on the objective of holding international portfolio. The chronic devaluation of Korean currency brings about the decrease in the returns from holding Korean securities by foreign investors. Second, the efficient frontiers, one without and with Korean securities in the portfolio, are derived by Markowitz normative portfolio model. Comparision of the efficient frontiers reveals that the inclusion of Korean securities improves the risk-return trade off of the international investment. This result explains well of the foreign investors`` demonstrated interests in the two mutual funds established in late 1981 and supports an argument that KOREA FUND will receive as equal interest. However, it is also found that the higher the degree of subjective downward adjustments by foreign investors specially in regard to overvalued exchange rate of Korean currency is, the smaller the expected benefits from holding Korean securities becomes.