FIN4426_Chap_3_s - Selecting Investments in a Global Market...

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Unformatted text preview: Selecting Investments in a Global Market The Case for Global Investments Global Investment Choices Historical Risk-Returns on Alternative Investments 3-2 Growing Investment Opportunities More investment instruments available in the financial markets as a results of technological advances and new regulations Ability to invest from a global perspective thanks to the globalization or integration of domestic and foreign financial markets Investment vehicles with a variety of maturities, risk- return characteristics, and cash flow patterns being spawned due to competition and deregulations in the financial sector 3-3 The Case for Global Investments 3 reasons U.S. investors should think of constructing global investment portfolios Ignoring foreign markets can substantially reduce the investment choices for U.S. investors The rates of return on non-U.S. securities often have substantially exceeded those for U.S.-only securities The low correlation between U.S. stock markets and many foreign markets can help to substantially reduce portfolio risk 3-4 The Case for Global Investments Relative Size of U.S. Financial Markets Overall value of the securities available in world capital market has increased from $2.3 Trillion in 1969 to $103 Trillion in 2006 and the U.S. portion has declined to less than half. The share of the U.S. in world stock and bond markets has dropped from about 65 percent of the total in 1969 to about 46 percent in 2006. The growing importance of foreign securities in world capital markets is likely to continue. Exhibit 3.1 shows the breakdown of securities in the global capital market. 3-5 Exhibit 3.1 3-6 The Case for Global Investments Rates of Return on U.S. and Foreign Securities Global Bond-Market Return: From 19992007, the return performance of the U.S. bond market ranked fifth out of the six countries when the returns are measured in U.S. dollar. The better performance of the non-U.S. markets is partly due to the weakened dollar in this time frame See Exhibit 3.2 Global Equity-Market Return From 2003 through 2006, the United States average rank in annual return measured in U.S. 3-7 Exhibit 3.2 3-8 The Case for Global Investments Risk of Combined Country Investments Diversification with foreign securities can help reduce portfolio risk because foreign markets have low correlation with U.S. capital markets. The correlation of returns between a single pair of countries changes over time because the factors influencing the correlation change over time. Diversified portfolios reduce variability of returns over time. Correlation coefficients measure diversification contribution. 3-9 The Case for Global Investments Global Bond Portfolio Risk Low positive correlation (Exhibit 3.4) For a U.S. investor, the average correlation between foreign bond return and U.S. bond return in U.S. dollars is about 0.63 from 1988 to 2006.in U....
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FIN4426_Chap_3_s - Selecting Investments in a Global Market...

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