Another significant way of managing risk is by arresting the exchange rate fluctuations which is only possible by internalization of the portfolio holdings. International currency rates are subject to fluctuations which are in most cases unpredictable. The exchange rate risk has been affecting the portfolio managers for quite a long time and the based way to manage the risk was to diversify their holdings in international economies (Biger, 1979). Portfolio managers could strategically internationalize their holdings in countries with strong currency which would reap supernormal returns for the portfolio managers. Internationalization of holdings would facilitate the portfolio managers to access a bigger market.
The portfolio managers could internationalize their holdings in countries that are less competitive which would yield best returns from the investment. This would lessen the market-oriented risks that would be faced by the portfolio managers. Thus, the portfolio managers could internationalize their holdings in order to engage in the diversification of portfolio assets. The international diversification of portfolio assets would help the portfolio managers to achieve high risk-adjusted return. Thus, this would mean that the portfolio managers could invest and internationalize their holdings to experience less volatility. This experience of less market volatility implies that the portfolio managers would be able to manage any market risks by internationalizing their holdings.
Based on the conventional financial theory, the participants and the economic agents around the world are considered to be rational wealth maximizer. However, there are several instances which would involve emotions and psychology in terms of decision making. The emotional and psychological engagement sometimes influences economic agents to behave unpredictably and irrationally. Behavioral finance is considered to be the new field which combines the aspect of behavior and cognitive psychological theory and associates this with the conventional economics and finance.