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Chapter 3

BU473 Chapter Notes - Chapter 3: Neuropeptide Y, Money Market Fund, Preferred Stock


Department
Business
Course Code
BU473
Professor
Steve Balaban
Chapter
3

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Chapter(3:(Selecting(Investments(in(a(Global(Market((
The$Case$for$Global$Investments$
3$reasons$to$invest$abroad:$$
o More$investment$choices$$
o Rates$of$return$are$higher$$
o Low$correlation$reduces$portfolio$risk$$
Diversification$$
o Help$reduce$portfolio$risk$$
o The$correlations$of$returns$between$a$single$pair$of$countries$changes$over$time$because$
the$factors$influencing$the$correlation$change$over$time$$
o Reduce$variability$of$returns$over$time$$
o Correlation*coefficients$measure$diversification$contribution$$$
Ranges$from$-1$to$+1$
Do$not$combine$investments$with$the$same$positive$correlation$$
Combining*2*assets*with*negative*correlation*is*ideal*for*diversification*$
Global*Bond*Portfolio*$
o Low$Positive$Correlation$$
Low$positive$correlations$among$returns$indicate$substantial*opportunities*for*risk*
reduction$$
§ Because$international$trade$patterns,$economic$growth$&$fiscal$&$monetary$
policies$differ$in$each$country$$
Adding*non-correlated*foreign*bonds*to*a*portfolio*of*Canadian*bonds*increase*rate*
of*return*and*reduces*portfolio*risk*$
Correlation$of$equities$is$similar$to$that$of$bonds$$
Canada-U.S.$correlation$(0.537~0.635)$is$higher$than$Canada-Japan$correlation$(0.389)$$
Opportunities$to$reduce$risk$by$adding$a$foreign$stock$$
$$
Global$Investment$Choices$$
More$investments$available$$
Fixed$Income$Investments$$
Contractual$payment$schedule$$
Savings*accounts*$
o Fixed$earnings$$
o Convenient$$
o Liquid$and$low$risk$$
o Low$rates$$
o Certificate*of*Deposit*(CDs)*$
<1$year$maturity$and$usually$insured$by$CDIC$$
o Guaranteed*Investment*Certificates*(GICs)*$
>1$year$maturity$and$usually$insured$by$CDIC$$
Corporate*bonds*$
Preferred*stock*$
o Hybrid$security$$
International$Bond$Investing$$
Eurobond,$Maple$bonds,$international$domestic$bonds$$
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