Investments by Multilateral Development Banks in Central America

• In Event: AIS and More

Abstract

Multilateral Development Banks (MDBs) are under increased pressure to increase the efficiency of asset allocation to provide an optimal growth in developing countries, such as those in Central America (CA). MDBs must consider trade-off between risk and return, which requires comparing the future returns of investment alternatives. Using the theoretical framework of the capital asset price model (CAPM) the extent of the relationship between the risk-free rate, volatility, market return, and expected return used by MDBs for CA loans was examined. Archival data were used including annual report, and audited financial statement to create a sample of 66 MDB loans for the years 1995 to 2013. A multiple regression model was used to identify the relationship of he expected return adjusted by risk-free rate, volatility, and market return on the market in comparison with the expected return used by MDBs in CA. There was not a statistically significant relationship between the expected return adjusted by the risk-free rate, volatility, market return, and the expected return used by MDBs in CA. The study results demonstrated that the expected return used by MDBs underperform risk adjusted market expectations. This study might help MDBs banking investment operations to promote business development and social welfare in CA through private investments and help MDBs leaders find the study’s results useful when proposing investment policies in CA countries.

Authors

• Jose Lopez Rojas, Walden University

• Roger William Mayer, SUNY College at Old Westbury

• Wen-Wen Chien, SUNY-Old Westbury