CURRENCY RISK AND INTERNATIONAL DIVERSIFICATION OF PROPERTY INVESTMENTS: A SINGAPOREAN INVESTOR'S VIEWPOINT

Abstract

International diversification of portfolios provides substantial opportunities for risk reduction and enhanced returns. This is possible when the correlation coefficients between markets are low or negative. However, this may not be so if currency risk is taken into consideration. Exchange rate volatility may erode the benefits of international diversification. This study is aimed at examining the impact of currency risk on international property investments from a Singaporean investor's perspective. After reviewing the relevant literature and a case study of fourteen countries, namely Singapore, United Kingdom, Australia, United States, France, Germany, Netherlands, Italy, Spain, Switzerland, Hong Kong, Indonesia, Japan and Malaysia, this study concludes, via hypothesis testing, that there is no significant difference between currency-adjusted and unadjusted returns, risk and correlation coefficients. Thus, the impact of exchange rate fluctuations on the portfolio is relatively minimal. This implies that hedging of investment returns is not necessary. Furthermore, the inter¬ temporal stability test reveals that the portfolios constructed are optimal as the efficient frontiers are stable over time.