Investment Enhancement Paper
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Investment Enhancement Paper

Course Number: BUS 200, Spring 2011

College/University: University of Phoenix

Word Count: 965

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Investment Enhancement Paper December 22nd, 2008 Introduction In order for an investor to experience strong returns from their portfolio they must be willing to look at many different investment vehicles for their investment capital. The use of international investments in a portfolio can really diversify their risk and add to the portfolios return. Additionally, the use of derivative securities can further...

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Enhancement Investment Paper December 22nd, 2008 Introduction In order for an investor to experience strong returns from their portfolio they must be willing to look at many different investment vehicles for their investment capital. The use of international investments in a portfolio can really diversify their risk and add to the portfolios return. Additionally, the use of derivative securities can further diversify risk and add to the returns of the portfolio. Alternative investments add options for a portfolio manager outside the normal vehicles like stocks, bonds and money market instruments. The more options one has in a market like this the better the performance of their portfolio is likely to be. International Investments An addition of an international investment portion to a portfolio can add risk to a portfolio but can also bring attractive returns. Investing in foreign nations carries two specific types of risks above and beyond the risks inherent in domestic investments. These risks are the exchange rate and the country specific risk. According to Investopedia.com, Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Exchange rate risk is the risk that the foreign nation in which one is investing will have its currency devalued comparatively to the investors home nation. Any devaluation would hurt the investors return on investment upon converting the currency back to the investors home currency. This works both ways and an investor can also make greater returns if the currency appreciates comparatively with the home nations currency. There are also manners in which an investor can protect his or her portfolio from this risk. Investors can hedge exchange rate risk using a forward or futures contract in foreign exchange. (Marcus, Kane, & Bodie, 2008). These forward or futures contracts can significantly protect a portfolio against this exchange rate risk by adding a level of certainty to the currency exchange process. According to Investopedia.com a futures contract is, A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. When an investor purchases currency futures for their portfolio then they are guaranteeing the rate they can exchange their currency for in the future, thereby reducing some of the variability of the returns from the foreign investment. Another specific risk to international investing is the country specific risk. Investing abroad can bring strong returns as well as help to diversify a portfolio, but the risks of investing in a business that operates in a different government environment can be significant. However, to achieve the same quality of information about assets in a foreign country is by nature more difficult and hence more expensive. Moreover, the risk of coming by false or misleading information is greater. (Marcus, Kane, & Bodie, 2008). There is also the risk when investing abroad that a foreign government may more be concerned with its own national welfare than with foreign investors rights. According to InfoPlease.com, Nationalization of foreign properties has occurred, especially in developing nations, where there is resentment of foreign control of major industries. Instances include Mexico's seizure of oil properties owned by U.S. corporations (1938), Iran's nationalization of the Anglo-Iranian Oil Company (1951), the nationalization of the Suez Canal Company (1956) by Egypt, and Chile's nationalization of its foreign-owned copper-mining industry (1971). Such expropriations raise complex problems of international law. While investing in foreign companies may achieve higher than normal returns it is important to realize that they come with their own specific risks that must first be considered before investment. Derivatives In addition to the securities that would normally be the first to come to a prospective investors mind like stocks and bonds there are additionally derivative securities which one could invest in. According to Investopedia.com, A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. These investments can be used to hedge the risk in other investments in a portfolio. They can also be used as a speculative investment in and of themselves. Derivative instruments include options, futures and swaps. According to Investopedia.com, Most derivatives are characterized by high leverage. This leverage has the intended effect of amplifying any moves by the underlying asset either to the upside or the down. This makes these derivatives an excellent instrument to make large returns or lose lots of investor value. That is why these types of contracts should be used with a thorough understanding of the risks involved and a sharp eye on the implications they may have on the investment portfolio as a whole. Conclusion In order to produce strong returns an investor must be open to considering all different types of investments. There are quite a number of different investment opportunities available in the financial world today. Without the use of different investment vehicles there is unlikely to be sufficient diversification in the portfolio. Additionally, many of the out of the norm investments provide the opportunity for exceptionally high returns. The lesson to be learned here is that there are opportunities in many different areas and an investor ought to keep an open mind about their investments. References: InfoPlease.com (2000-2008). Nationalization. Retrieved December 22, 2008, from http:// www.infoplease.com/ce6/history/A0834953.html Investopedia.com (2008). Terms Page. Retrieved December 22, 2008, from http://www.investopedia.com/terms Marcus, A. J., Kane, A., & Bodie, Z. (2008). Essentials of Investments, Seventh Edition. [University of Phoenix Custom Edition e-Text]. , : McGraw-Hill. Retrieved December 22, 2008, from University Of Phoenix, INVESTMENT FUNDAMENTALS AND PORTFOLIO MANAGEMENT FIN/402.

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