Transcript Lecture Presentation to accompany Investment Analysis

Selecting Investments in a
Global Market
Innovative Financial Instruments
Dr. A. DeMaskey
Chapter 3
The Case for Global
Investments
Growth and development of foreign
financial markets
Advances in telecommunications
Mergers of firms and security
exchanges
Reasons for global investing
More investment opportunities
Better rates of returns
Greater potential for diversification
Relative Size of
U.S. Financial Markets
Prior to 1970, U.S. stock and bond market
made up about 65% of all securities traded
worldwide.
By 1998, U.S. securities accounted for only
47% of the world total.
Overall value has increased from $2.3 Trillion
to $58.2 Trillion.
This trend is likely to continue, and not
investing in foreign markets is to ignore 53%
of the available securities
Rates of Return on U.S.
and Foreign Securities
Many non-U.S. securities provide superior
rates of return.
Total domestic return
Total return in U.S. dollar terms
Risk of Combined Country
Investments
Diversified portfolios reduce variability of
returns over time
Correlation coefficients measure
diversification contribution
Compare correlation of return among U.S.
bonds and stocks with returns on foreign
bonds and stocks
Global Bond Portfolio Risk
Low positive correlation
Opportunities for U.S. investors to reduce
risk
Correlation changes over time
Adding non-correlated foreign bonds to a
portfolio of U.S. bonds increases the rate
of return and reduces the risk of the
portfolio
Global Equity Portfolio
Risk
Low positive correlation
Opportunities to reduce risk of stock
portfolio by including foreign stocks
Summary on Global
Investing
Absolute and relative sizes of U.S. and
foreign markets for stocks and bonds
Rates of return available on non-U.S.
securities often exceed U.S. securities
Diversification with foreign securities can
help reduce portfolio risk because of their
low correlation with U.S. securities
Global Investment Choices
Fixed-income investments
Equity investments
Special equity instruments
Forward and Futures contracts
Investment companies
Real assets
Low-liquidity investments
Fixed-Income Investments
Savings Accounts
Preferred Stock
Passbook savings account
International Bond
Certificate of deposit
Investing
Money market certificate
Capital Market
Instruments
U.S. Treasury securities
U.S. government agency
securities
Municipal bonds
Corporate bonds
Eurobond
Yankee bond
Foreign access to
domestic bonds
Equity Instruments
Common stock
Foreign equities
American Depository Receipts (ADRs)
American shares
Foreign shares
Foreign shares listed on U.S. exchanges
International or global mutual funds
Special Equity Instruments
Warrant
Call option
Put option
Futures Instruments
Futures Contracts
Commodity futures
Financial futures
Index futures
Forward Contracts
Investment Companies
Money Market Funds
Bond Funds
Common Stock Funds
Balanced Funds
Real Estate
Real Estate Investment Trust (REIT)
Direct Real Estate Investment
Home ownership
Raw land
Land development
Rental property
Low-Liquidity Investments
Antiques
Art
Coins
Stamps
Diamonds
Historical Risk/Returns on
Alternative Investments
Returns on Stocks, Bonds and T-bills
World Portfolio Performance
Art and Antiques
Real Estate
Returns of Stocks, Bonds, and
T-Bills
Ibbotson and Sinquefield (I&S) examined
nominal and real rates of return for seven major
classes of assets in the U.S. for the period 19261998
They computed geometric and arithmetic mean
rates of return
They derived four return premiums
Risk premium
Small-stock premium
Horizon premium
Default premium
Returns of Stocks, Bonds,
and T-Bills
They adjusted the returns of the series for
inflation
The study tends to confirm the idea that:
Returns and risk increase together
Rates of return are generally consistent with the
uncertainty of returns
World Portfolio
Performance
Reilly studied world portfolios for the period
1980-1997
Asset return and risk relationship is confirmed
Coefficients of variation ranged widely,
showing benefits of global diversification
Correlations between asset returns varied by
global regions
Art and Antiques
Market data is limited
Reilly studies the return series on art and
antiques for the period 1976-1991
Results vary widely, and change over time,
making generalization impossible, but
showing a reasonably consistent relationship
between risk and return
Correlation coefficients vary widely, allowing
for great diversification potential
Liquidity is still a concern
Real Estate
Returns are difficult to derive due to lack of
consistent data
Study by Goetzman and Ibbotson found:
Residential real estate had lower risk and return
than commercial real estate
During some short time periods, REITs had higher
returns than stocks with lower risk measures
Long term returns for real estate are lower than
for stocks, and have lower risk
Potential for diversification exists due to:
Negative correlation between residential and farm
real estate and stocks
Low positive correlation between commercial real
estate and stocks
The Internet:
Investments Online
www.wiso.gwdg.de/ifbg/finance.html
www.global-investor.com
www.nfsn.com
www.emgmkts.com
www.datastream.com
www.www.euro.net/innovation/Finance_Base/Fin_
ency.html
www.sothebys.com