FIN 521 Chapter Notes - Chapter 3: High-Yield Debt, Call Option, Commercial Paper
Document Summary
Chapter 3: selecting investments in the global market. Your goal should be to build a balanced portfolio of investments with a relatively stable return. Because more investment opportunities broaden the range of risk-return choices, it makes sense to evaluate foreign when selecting investments and building a portfolio: the returns available on foreign securities often have substantially exceeded those for canadian-only securities. The higher returns on these foreign equities can be justified by the higher growth rates for the countries where they are issued: a major tenet of investment theory is that investors should diversify their portfolios. Because the relevant factor when diversifying a portfolio is low correlation between assets returns over time, diversification with foreign securities that have very low correlation with canadian securities can substantially reduce portfolio risk. To measure whether two investments will contribute to diversifying a portfolio, we compute the correlation coefficient between their return over time. Correlation coefficient can range from +1. 00 to -1. 00.
