Transcript Class 2 - University of Southern California

Fixed Income Market (2):
Corporate Debt and Equity
Week 14 – November 23, 2005
J. K. Dietrich - FBE 524 - Fall, 2005
Corporate Financing
 In
2002, non-farm non-financial corporations hold
title to $9.1 trillion in tangible assets (real estate of
$4.7 trillion, equipment and software of $3.2
trillion, and inventories of $ 1.2 trillion, according
to the Flow of Funds)
 Households held $16.3 trillion, of which $12
trillion is real estate, consumer durables $2.9
trillion
J. K. Dietrich - FBE 524 - Fall, 2005
Financing Corporate Investment
 Investments
can be financed in part by operating
cash flows and retention of earnings
 Internally generated cash flows (depreciation
charges and retained earnings) finance most U.S.
investment (e.g. $795.5 billion non-farm nonfinancial corporate investment in 2002,
depreciation charges $827.5 billion)
 Capital markets provide marginal financing
J. K. Dietrich - FBE 524 - Fall, 2005
Debt versus Equity
 Income
from corporate assets are divided
among claim-holders but total value of
assets are not affected by the division of
income (Modigliani-Miller theorems)
 Principal-agent problems
– Managers versus shareholders
– Debt-holders versus residual claimants
 Pecking
order theory of corporate financing
 Tax advantage of debt
J. K. Dietrich - FBE 524 - Fall, 2005
Taxation and Corporate Finance
 Recent
provisions which affected corporate
financing
– Investment tax credit (ITC)
– Depreciation rules
– Passive income (losses)
 The
Tax Reform Act of 1986 (TRA)
– Reduced corporate tax rate
– Removed many tax advantages
J. K. Dietrich - FBE 524 - Fall, 2005
Impact of Taxation on Financing
 Leasing
– Banks and other financial firms have small
capital investments
– Banks and other financial firms have little
depreciation
– Banks and leasing before 1986
 Real-estate
financing before 1986
 Desirability of debt financing before and
after 1986
J. K. Dietrich - FBE 524 - Fall, 2005
Corporate Fixed-incomes
 Types
of corporate debt instruments
– Short-term
» Bank borrowings
» Open-market borrowing (commercial paper and
bankers’ acceptances)
– Long-term
» Secured (mortgages, secured debt)
» Term loans, project financing
» Unsecured debt
 Public
debt versus private debt placements
J. K. Dietrich - FBE 524 - Fall, 2005
Major Sources of Funds
Corporate Debt Markets
Total Financial Liabilities
Commercial Paper
Bank Loans
Corporate Bonds
Mortgages
Trade Payables
Market Value of Equity
1960
229.6
0.8
37.4
76.2
28.6
61.9
365.2
1975
1,086.9
9.6
143.5
253.8
112.7
176.4
761.2
1985
3,308.2
72.2
424.1
578.2
163.1
479.7
1,916.9
1990
4,729.4
116.9
545.5
1,008.2
263.7
626.3
2,967.1
Share
Commercial Paper
Bank Loans
Corporate Bonds
Mortgages
Trade Payables
Debt/Equity Ratio
0.3%
16.3%
33.2%
12.5%
27.0%
0.63
0.9%
13.2%
23.4%
10.4%
16.2%
1.43
2.2%
12.8%
17.5%
4.9%
14.5%
1.73
2.5%
11.5%
21.3%
5.6%
13.2%
1.59
Source: Flow of Funds
J. K. Dietrich - FBE 524 - Fall, 2005
2004
10,254.1 Growth
101.7
11.6%
593.2
6.5%
2,947.4
8.7%
655.0
7.4%
1,589.5
7.7%
7,910.4
7.2%
1.0%
5.8%
28.7%
6.4%
15.5%
1.30
Bank versus Public Financing
 Banks
traditionally were short-term lenders
 Banks had relationships with corporate (and
other business) borrowers
– Access to information (e.g. deposits)
– Special relationship to management
 Banks
monitored business borrowers
– Covenants in loan agreements
– Specialization in business monitoring
– Cash flow lenders versus asset-based lending
J. K. Dietrich - FBE 524 - Fall, 2005
Changing Bank Loan Market
 Bank
lending is global market:
Bank Loans n.e.c.:
Commercial Banks
Foreign Banks
Foreign Bank Share
1960
58.3
57.6
0.7
1.2%
1975
265.8
242.1
19.1
7.2%
1985
661.7
546.8
75.8
11.5%
1990
820.0
645.2
156.5
19.1%
2004
1,325.3
1,072.9
226.8
17.1%
Source: Flow of Funds
 U.S.
banks have lost short-term customers
to the open market in the form of openmarket paper (commercial paper), to
foreign banks, and to finance companies
J. K. Dietrich - FBE 524 - Fall, 2005
Banks and Corporate Financing
 Banks
serve corporations by off-balance
sheet and market-making activities
– Underwriting commercial paper, issuing credit
guarantees/letters of credit backing borrowings
– Risk-management services
 Arranging ABS
securities issues and
advising corporate customers in private
placements and mergers and acquisitions
 Many think banks accept more risk
J. K. Dietrich - FBE 524 - Fall, 2005
Banks versus of Open-Markets
 U.S.
corporate financing has moved
extensively to greater reliance on markets
for funds
 Contrast with Europe and Japan until
recently
 Corporate governance in the form of
shareholder activism is also highly
developed in U.S. relative to foreign
markets
J. K. Dietrich - FBE 524 - Fall, 2005
Anglo-Saxon Finance
 Focus
on shareholder wealth maximization
 Markets and legal system provide discipline
for management
 Alternative to politics and negotiation
– Role of deregulation (airlines, trucking,
utilities, financial services) is important
– Growth of institutional investors is important
 U.S.
shareholder activism is recent and
perhaps we are seeing a precursor of future
J. K. Dietrich - FBE 524 - Fall, 2005
Investors in Corporate Debt
Investment in Bonds:
1960
Households 10.6
Rest of the World
0.7
Life Insurance Companies 48.1
Pension Funds
9.0
Mutual Funds
0.4
Share of Bonds* 1960
Households 11.5%
Rest of the World 0.8%
Life Insurance Companies 52.4%
Pension Funds 9.8%
Mutual Funds 0.4%
1975
62.9
4.6
105.5
81.1
4.3
1975
18.7%
1.4%
31.4%
24.1%
1.3%
1985
77.4
126.4
280.6
204.6
22.2
1985
8.8%
14.3%
31.8%
23.2%
2.5%
* Total includes non-financial and financial corporate business bonds
J. K. Dietrich - FBE 524 - Fall, 2005
1990
219.0
217.2
566.9
299.6
59.3
1990
12.8%
12.7%
33.2%
17.6%
3.5%
2004
220.8
1,765.1
1,753.4
662.0
622.8
2002
3.2%
25.2%
25.0%
9.4%
8.9%
Source: Flow of Funds
Nature of Corporate Debt
 Indenture
– Covenants
– Trustees and enforcement
 Terms
and series
 Security of income and principal
– Collateral and liens
– Seniority of claim: debentures, junior debt
 Special
features: control, sinking funds, call
features, conversion features
J. K. Dietrich - FBE 524 - Fall, 2005
Bonds and Options (1)
 Equity
can be viewed as a call option on the
value of the assets of the firm with the
exercise price payment of debt claims
 Bonds therefore can be viewed as a risk-free
security combined with a put option on the
assets of the firm at the debt face value
 The default possibility is there the
likelihood of exercise of the put on the
firm’s assets
J. K. Dietrich - FBE 524 - Fall, 2005
Risk-Free Bond and Asset Put
F
F
Risk-Free Bond
Risky Bond
Asset Put
0
0
F
J. K. Dietrich - FBE 524 - Fall, 2005
Asset Value
F
Asset Value
Bonds and Options (2)
 Convertible
bonds can be converted into
some other security, usually common stock
– Conversion ratio or price: e.g. each bond
equals 20 shares means each $1,000 face value
of debt can be converted into 50 shares of stock
– This is valuable if shares are worth more than
$50
– If bond pays interest and stock does not pay
dividends, investors will keep bonds even if
price of stock is above $50 unless called
J. K. Dietrich - FBE 524 - Fall, 2005
Convertible Bonds
F
Convertible Risky Bond
0
F
J. K. Dietrich - FBE 524 - Fall, 2005
Asset Value
Bonds and Options (3)
 A callable,
convertible bond can thus be
viewed as a risk-free bond with three
options attached:
– An asset put option (default possibility)
– A bond call option (to force conversion)
– A stock call option (value of stock)
 These
features can be used to price the
bonds, hence the importance today of option
pricing by so-called rocket scientists
J. K. Dietrich - FBE 524 - Fall, 2005
Developments in Debt: Junk
 Junk
bonds are below investment grade
(BBB) or non-rated bonds
 Banks and insurance companies are
restricted (in many instances) to
investments in investment-grade bonds
 Bonds can substitute for more expensive
financing (e.g. bank loans) if principalagent problems can be overcome
– Junk bonds and free cash flow or quasi-equity
J. K. Dietrich - FBE 524 - Fall, 2005
Developments: Structured Notes
 There
is no limit on the design of financial
market instruments
 The term fixed income refers to the fact that
the payments are fixed by external factors
but does not mean that payments are fixed
 Structured notes take advantage of design
flexibility to create fixed incomes which
appeal to certain investors or issuers
J. K. Dietrich - FBE 524 - Fall, 2005
Structured Note Innovations
 Investors
believe rates will stay low
– Agencies issues inverse floating-rate notes
– Rates tied to an index like 3-month LIBOR
– Interest calculated with a formula like:
Rate Paid  18  3  3  monthLIBO R
 Catastrophe
risk bonds for insurance
companies where repayment of debt linked
to an index of property-damage claims
J. K. Dietrich - FBE 524 - Fall, 2005
Asset-Backed Securities
 Less
well known corporate borrowers pool
their obligations (like commercial paper) in
a facility which borrows in corporate debt
market
 Example: collateralized loan obligation
(CMO)
 ABS issues earn high credit ratings through
over-collateralization and guarantees of
third parties (e.g. banks)
J. K. Dietrich - FBE 524 - Fall, 2005
Banks Sell Loans
 Loan
syndications
 Banks sell loans from balance sheet (e.g.
collateralized loan obligations (CLOs))
– Reduce capital requirements
– Allow for faster growth
 A part
of the unbundling banks and other
financial services, that is, unlinking funding
activities from investing activities and other
services
J. K. Dietrich - FBE 524 - Fall, 2005
Capital Effect on $5 billion CLO
Assumptions:
Loan portfolio yield
Bank funding costs
CLO execution spread
Net spread earned
Risk Based Capital
Return on capital
J. K. Dietrich - FBE 524 - Fall, 2005
LIBOR + 75 basis points
LIBOR – 12.5 basis points
LIBOR + 19 basis points
Before CLO
After CLO
$43,750,000
(L+75-L+12.5)
$400,000,000
($5 bi. x 8%)
10.9%
$28,000,000
(L+75-L+19)
$100,000,000
(100%
reserve)
28.0%
Structure of CLO
Issuing Trust
Unaffiliated
Institution
Investor
Unaffiliated
Institution
Investor
Unaffiliated
Institution
Investor
J. K. Dietrich - FBE 524 - Fall, 2005
Special
Purpose
Vehicle (SPV)
Servicer
(Bank)
Bank
Lender
Business
Borrowers
“The Stock Market”
 Market
for equity represents residual claims
on real assets (plant, equipment, human
capital, etc.)
 There are many equity markets
–
–
–
–
Private equity (individual owners)
Partnership shares
Privately held corporations
Publicly traded corporations
J. K. Dietrich - FBE 524 - Fall, 2005
Level of Stock Valuation
 Indices
measure average values relative to some
base year and include some group of publicly
traded stocks
 Key U. S. stock indices are:
–
–
–
–
–
Dow-Jones (30 industrials, etc.)
NYSE - all stocks, plus industrial subgroups
S&P 500 industrials, other subgroups
NASDAQ
Other Indices: Russell indices, Wilshire 5000, Morgan
Stanley Capital International (MSCI)
J. K. Dietrich - FBE 524 - Fall, 2005
Foreign Indices
 Major
–
–
–
–
market indices
London Stock Exchange (LSE) FTSE 100
Frankfurt (Deutsche Boerse) DAX
Paris CAC 40
Tokyo NIKKEI 225
 Morgan
Stanley Capital International
country and regional indices
 Dow-Jones indices
J. K. Dietrich - FBE 524 - Fall, 2005
Integration/Fragmentation
 Buyers
and sellers want the best prices and lowest
execution costs available anywhere
 Concentration of trading means more volume
 Most exchanges (e.g. NYSE, LSE) are owned by
broker seat-holders (members)
– However, both NYSE and LSE may soon become
public companies
– Many exchanges have converted (e.g. CME)
 Concentration
of trading can give markets
monopoly power
J. K. Dietrich - FBE 524 - Fall, 2005
Exchange Structure
 Listed
securities satisfy listing criteria
 Members own seats and agree to obey rules
 Members may have specialized functions,
as in NYSE
–
–
–
–
Specialists have obligations and privileges
Floor traders buy and sell for own account
Commission and floor brokers execute orders
Brokers execute customers’ orders either with
specialists, floor traders, or other brokers
J. K. Dietrich - FBE 524 - Fall, 2005
U.S. Markets prior to 1975
CSE
NYSE
MWSE
ASE
BSE
J. K. Dietrich - FBE 524 - Fall, 2005
PSE
National Market System (NMS)
 Amendments
to the Securities Act passed in
1975
 Ended commissions fixed by stock
exchange rules which are reviewed by SEC
 Called for creation of a national market
system where traded integrated across
exchanges
 Eroded large exchange monopoly power
J. K. Dietrich - FBE 524 - Fall, 2005
U.S. Markets after 1975
ITS
CSE
NYSE
MWSE
BSE
J. K. Dietrich - FBE 524 - Fall, 2005
Composite Tape
PSE
ASE
Trading in Listed Securities
 Exchange
floor
 Upstairs market = large block transactions
arranged by member firms, reported on the
exchange with floor participation required,
and called the second market
 Large block floor transactions arranged by
non-member firms (off the floor), called the
third market
 Trades between institutions, fourth market
J. K. Dietrich - FBE 524 - Fall, 2005
Over-the-Counter Markets
 Communication
links between brokers and
multiple market makers who quote a price
at which they will buy or sell securities
 National Association of Securities Dealers
(NASD) Automated Quotation System
(NASDAQ) National Market System links
market makers of larger companies
 NASDAQ Small Cap market has lower
listing requirements
J. K. Dietrich - FBE 524 - Fall, 2005
S&P 500 Index since 1960
S & P 500 Index (1943-1945-100)
1600
1200
800
400
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
SP500E
J. K. Dietrich - FBE 524 - Fall, 2005
Derivative Markets
 Listed
options beginning in 1973 (Chicago
Board Options Exchange or CBOE)
 Index futures and options in 1982 (Chicago
and elsewhere)
 Portfolio insurance
 Transactions costs of equity risk exposure
 Market integration
J. K. Dietrich - FBE 524 - Fall, 2005
1987
 Stock
market crash or Market Break of 1987
 Brady Commission and analyses of relation
between stock, options, and futures markets
– Margin differences
– Trading halts and price or index differences
– Regulatory turf wars (SEC, CFTC)
 Circuit
breakers and other remedies
J. K. Dietrich - FBE 524 - Fall, 2005
Raising Equity
 Small
firms finance studied in Berger and
Udell (1998) for U.S.
– Small firms and economic growth
– Small firms and developing economies
 Angel
capital and small-firm finance
 Venture capital funds
 Debt and equity in small business finance
 Initial public offerings (IPOs)
J. K. Dietrich - FBE 524 - Fall, 2005
Current Issues in Equity Trading
 Global
capital market integration
– Concern is market fragmentation
 Three
conflicting trends in equity trading
– Consolidation of global trading in largest
markets (e.g. American Depository Receipts or
ADRs and Brazilian market)
– Affiliations and mergers between exchanges
(Singapore and NASDAQ, Europe)
– Electronic Communication Networks (ECN)
and Internet-based trading
J. K. Dietrich - FBE 524 - Fall, 2005
Trading Volume
 For
every buyer, there is a seller
– Buyers and sellers can order broker to buy/sell
at market or place a stop order
 Trading
in stocks comes from buy/sell
orders from categories defined
–
–
–
–
Institutional traders and block traders
Individual traders
Information and noise traders
Arbitrage traders, speculators, short-sellers
J. K. Dietrich - FBE 524 - Fall, 2005
Returns on Stocks and Bonds
 Relevant
return for investors is holdingperiod returns on their investments
 Most widely used source of return data is
annual update of Ibbotson and Sinquefield’s
Stocks, Bonds, Bills, and Inflation: 2000
Yearbook
 Annual returns based on monthly data from
1926 starting point for analyzing different
classes of assets’ returns
J. K. Dietrich - FBE 524 - Fall, 2005
Total Annual Returns, 1926-2002
Common Stocks
Small-Company Stocks
Long-Term Corporate Bonds
Long-Term Government Bonds
U.S. Treasury Bills
Inflation
Return (%) Standard Deviation (%)
12.2
20.5
16.9
33.2
6.2
8.7
5.8
9.4
3.8
3.2
3.1
4.4
Ross, Westerfield, Jaffe, Corporate Finance 7th Ed. (2005)
J. K. Dietrich - FBE 524 - Fall, 2005
S&P P-E Ratio 1960 to 2004
S&P 500 Composite P-E Ratio 1960 to 2004
120
Series: SPE5COMM
Sample 1960M01 2004M12
Observations 540
100
80
60
40
20
0
10
20
Source: Haver Data Base, Econviews
J. K. Dietrich - FBE 524 - Fall, 2005
30
40
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
17.40604
16.99500
46.50000
6.680000
7.177996
1.162655
5.166622
Jarque-Bera
Probability
227.2796
0.000000
What Explained U.S. Market?
 New
era explanation
– Growth steadier and higher
» Global economic expansion and market economies
» Spread of equity markets and market integration
– Uncertainty reduced
– Demand for equities increased
» Baby boomers
» Global spread of capital markets
 Risk
premium reduced to level around 4%
J. K. Dietrich - FBE 524 - Fall, 2005
Alternative: Speculative Bubble
 History
is filled with periods of temporary stock
market valuation
– Classic Tulip Mania and South Seas bubbles
– Japanese bubble
 Recent
changes foster potential for naïve investors
to make errors
– Internet trading
– Shift to self-directed retirement savings
 Historical
J. K. Dietrich - FBE 524 - Fall, 2005
relations will return (but when?)
Recent Market Performance
 Stock
indices down from recent highs
 Rates of return very high (over 20% per
year) until 2000, then became negative
 Adjustment to lower risk premium could
explain change in P-Es and very high
returns
 Implications are lower returns in future
– See numerical example
J. K. Dietrich - FBE 524 - Fall, 2005
Example of Adjustment
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
r
0.1300
0.1275
0.1250
0.1225
0.1200
0.1175
0.1150
0.1125
0.1100
0.1075
0.1050
0.1025
0.1000
0.1000
0.1000
0.1000
J. K. Dietrich - FBE 524 - Fall, 2005
g
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
payout
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
P-E
10.0
10.5
11.1
11.8
12.5
13.3
14.3
15.4
16.7
18.2
20.0
22.2
25.0
25.0
25.0
25.0
Index
400
455
518
593
680
784
907
1055
1234
1454
1727
2073
2518
2720
2937
3172
Return Earnings
40.00
18.7%
43.20
18.8%
46.66
18.9%
50.39
19.0%
54.42
19.2%
58.77
19.5%
63.47
19.8%
68.55
20.3%
74.04
20.8%
79.96
21.6%
86.36
22.5%
93.27
23.8%
100.73
10.0%
108.78
10.0%
117.49
10.0%
126.89
Global Equity Markets 1999
Number of
Firms
7,561
2,470
1,945
968
933
725
Market
Capitalization
(Billions)
$16,635
4,547
2,933
1,475
1,432
309
Non-OECD
China
Taiwan
950
462
331
376
World Total
35,044
35,346
Country
U.S.A.
Japan
United Kingdom
France
Germany
South Korea
Source: IMF Working Paper 00/216
J. K. Dietrich - FBE 524 - Fall, 2005
Percent of
Global Total
47.06%
12.86%
8.30%
4.17%
4.05%
0.87%
0.94%
1.06%
100.00%
Emerging Market Performance
Country
China
South Korea
Taiwan
Asia
East Europe
Latin America
Composite
Price Index
(1988=100)
Year-to-Date Total
Return (%)
44.89
51.09
117.96
106.96
71.32
531.87
198.21
-4.51
-7.29
-15.95
N/a
N/a
N/a
-21.3
Source:IFC S&P/IFCI Index, 3/28/2002 (column 2) and WSJ, 11/15/2002 (column 3)
J. K. Dietrich - FBE 524 - Fall, 2005
Small-Firm Public Equity Market
 In
addition to main exchanges, many
countries have second board markets
(SBMs) to list smaller firms (start-ups,
technology firms, etc.)
 In U.S., Nasdaq small-cap market, Germany
Neuer Markt, Japan MOTHERS
 In Asia, also have SBMs in many countries
– Sometimes a subunit of main exchange
– Can be separate exchange with own trading
mechanisms
J. K. Dietrich - FBE 524 - Fall, 2005
Private/Public Equity Markets
 Venture
capital is important source of startup and restructuring firm financing
– Provides many services, including advice on
strategy, staffing, and financing
– Often have board roles
 Venture
capitalists might exploit
entrepreneurs if they did not have the goal
of going public
J. K. Dietrich - FBE 524 - Fall, 2005
Issues in Global Markets
 Integration
of capital markets
– How much or how little do events in one
market reflect events in other markets
– Expected real returns across markets
 Benefits
of diversification
– Risk reduction through correlations of returns
– How to choose portfolio allocations
 Risks
of international investing
J. K. Dietrich - FBE 524 - Fall, 2005
Recent Findings
 Importance
of global effects has increased
in the “new economy” of the 1990’s
 Emerging country specific risk has
increased dramatically since the crises of
the 1990’s while developed-country specific
risk has declined
 Industry factors, especially technology,
probably explain higher correlations
J. K. Dietrich - FBE 524 - Fall, 2005
Global Financial Management
 Investment
in assets
– Find highest NPV or highest return projects on
a risk-adjusted basis
– Cash flows measured in purchasing power of
owners (maximize shareholders’ wealth!)
 Financing
– Minimize cost of funds on a risk-adjusted basis
 International
finance: analysis of currency
and political risks that are unique to foreign
operations
J. K. Dietrich - FBE 524 - Fall, 2005
Currency and Political Risk
 Currency
risk is variability in cash returns
due to variations in exchange rates
– For important currencies can be hedged in
financial markets
– Often can be hedged on the balance sheet by
operating and financing policies
– Some currencies cannot be hedged: what kind
of risk is currency risk (systematic, liquidity,
etc.)?
J. K. Dietrich - FBE 524 - Fall, 2005
Foreign Exchange Markets
 Largest
market in the world, with estimated
$1.5 trillion daily turnover
 Biggest concentration in is London (32%),
United States (18%), Japan (8%)
 Most London trading by U.S. firms there
 2,000 dealers
 Dollar involved in 87% trades
 OTC market is over 90% activity, including
derivatives (e.g. options, swaps)
J. K. Dietrich - FBE 524 - Fall, 2005
International Capital Flows
 Where
are highest real returns to be found
in the world today?
– Emerging market economies (educated, hardworking labor, low capital stocks)
– The United States? (capital inflow, new
economy, benign business environment)
– Europe? (opening to East, Euro, restructuring)
– Latin America?
J. K. Dietrich - FBE 524 - Fall, 2005
Determinants of Capital Flows
 Take
advantage of higher returns
– Japanese investments in Asian neighbors
– OPEC investments in diversified economies
 Benefits
from diversification
– Pension funds and other institutional flows
 Arbitrage
risk-return differentials
– Temporary differentials that are expected to go
away, as from political threats that can be
managed by diversification
J. K. Dietrich - FBE 524 - Fall, 2005
Issues in International Investing
 Taxes
and/or restrictions of payment of
dividends or proceeds of sale
 Currency related issues
– Ability to hedge and/or convert cash flows
– Costs of currency hedging and/or conversion
– Currency risk due to economic fundamentals
(devaluation/revaluation)
 Liquidity
J. K. Dietrich - FBE 524 - Fall, 2005
and transaction costs
Conclusions
 High
returns in U.S. market in recent past
were unlikely to continue but interpretation
not easy
 Diversification is always rational
 Some foreign markets have languished in
recent years (but not all, e.g. U.K.)
 Economic systems contain self-corrective
forces but adjustments may take all long
time
J. K. Dietrich - FBE 524 - Fall, 2005
Next Class – Nov. 30, 2005
 Read
Chapters 23 and 24
 Remember due date on group project is in
two weeks, November 30
 Final is scheduled on December 7, 7:00 to
9:00pm
 Review objectives and slides and determine
whether you would find review session
useful
J. K. Dietrich - FBE 524 - Fall, 2005