Abstract
The purpose of this paper is to analyze the effects of international portfolio diversification on an investment portfolio. In doing this, alternative investment vehicles will also be examined. Finally, derivative securities will be discussed, as well as how they can further enhance a portfolio's performance.
Investment Enhancement Paper
There are several factors to consider when one is trying to evaluate on how to invest their money. A good starting ground however is to evaluate not just which funds to pick, but rather what the portfolio should be comprised of. There are three different separate items that will be evaluated here. First, the effects of international diversification on an investment portfolio will be analyzed. Next, alternative investment vehicles will be examined and discussed. Finally, how the use of derivative securities can further enhance a portfolio's performance will be explained.
Several people have looked at choices outside of investments within the United Sates. International portfolios are not uncommon anymore. International portfolios can create an even higher diversification for the customer. This is because if the United States stock market crashes, the majority of your portfolio will pretty much be lost. Even if there is a dip, overall, the impacts could be huge. However, if one was to take say 40% of there funds and allocate it in international stock markets, all of your investments will not be contingent on how one specific stock market or economy is doing. Thus, a much broader form of diversification is created.
After one has evaluated if an international portfolio is something that they would want to invest in, the next step is investing alternative investment vehicles. There are several different types of investments. Stocks, bonds, money markets, mutual funds, CD's and so on. There are also other types of investments that can be made such as property, collector's items, and so on.
Derivative securities are yet another alternative investment vehicle that can further or enhance a portfolio's performance. A derivative security is a "security whose returns are dependent on the current price of an underlying asset and they allow investors to offset the position of their cash market positions." www.commerceinvest.com/Education/terms/TermPages/D.htm
The market for derivative securities has grown very large in the past few years. Worldwide these securities provide "insurance" on an estimated $16 trillion of financial securities. A good comparison is the derivatives market is similar to the insurance industry as "their economic function is to transfer risk from those who do not want to bear it to those who are willing to bear it for a fee.
The fact that majority of the capital funds was in the form of portfolio capital instead of foreign direct investment (FDI) had also worsen the situation. The ratio of portfolio capital to FDI had increased substantially from 1:1.3 in 1990 to 1:6.5 in 1993. Given the volatile nature, portfolio capital tends to respond with greater speed to changes in the environment.
...r investments that can support the other weight and balance their portfolio and therefore alleviate some of the risk they face.
Some investors are wary about the process of investing internationally, carrying the concept that it is always to precarious and complex. While there are risks involved with international investing, there are also very beneficial and profitable reasons for doing so. Ev...
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
The execution of our investment strategy occurred in three stages. First, we invested in t-bills and bonds according to our original set out investment plan. This was to decrease potential losses and risk associated with the declining equity market. Therefore, we invested about two hundred thousand of our funds into these low risk assets to maintain buying power. Due to inflation, we did not want to lose buying power by leaving funds in an account without earning interest. Further, we invested a small portion of funds into the commodity market. With a slumping equity market and a positive outlook on the gold commodity, we invested in Gold Corporation at the same time we invested in income assets.
Investing or venturing into the international market involves critical analysis of the internal and external environment in which the company operates. Usually, a company will decide to venture internationally due to a saturated market or fierce competition in the current country of operation. The demand for a company’s products may have diminished as a result of an economic crisis thus the company will target a foreign market to sustain its sales. In other words, the firms expand internationally to seek new customers for its products. For example, the current Euro zone crisis led to low demand in Europe and many companies extended their businesses to emerging markets where demand was high. A company may also venture in the international market to enhance the cost-effectiveness of its operations especially for manufacturing companies that will benefit from low costs of production in developing world. Global expansion is a long term project as it involves demanding logistics to be successful. Thorough research must be undertaken to ensure that the expansion will create value for share...
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
Many factors have contributed to the impressive growth of Korean derivatives market. Some of the main contributing factors are:
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
...ll as private sectors have gone international with new ventures outside the country. These companies are generating revenue, though modest compared to their overall sales revenue, by deputing their expert personnel outside.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.