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CHAPTER 3
SELECTING INVESTMENTS IN A GLOBAL MARKET
I. The Case for Global Investments
A. Reasons for the expansion of investment opportunities
1. Growth and development of foreign financial markets
B. The Case for Global Investment Portfolios
1. Ignoring foreign markets can substantially reduce the investment choices for investors
C. Relative Size of the Global Financial Markets (Exhibit 3.1)
1. The size has grown from $2.3 trillion from 1969 to over $103 trillion in 2006
D. Rates of Return on Various Securities
1. Global Bond Market Returns (Exhibits 3.2 and 3.3)
2. Global Equity-Market Returns (Exhibit 3.4)
E. Risk of Combined Country Investments
1. Correlation Coefficient – a relative measure of the relationship between two series
over time. A value of +1.00 (perfect positive correlation) means the rates of return
for the two investments move exactly together. A value of -1.00 (perfect negative
correlation) means that the rates of return for the two investments move exactly
opposite to each other. A value of 0 indicates that the movement in the rate of return
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II. Global Investment Choices
A. Fixed Income Investments – contractually mandated payment schedules
1. Savings Accounts – usually no minimum balance or required term
Money Market Certificates – instruments that require minimum deposits for
imposed for early withdrawal
2. Capital Market Instruments – fixed income instruments that trade in the secondary
market
a. Government securities
Include bills, notes, and bonds
Backed by the issuing Federal, Provincial, Territorial or Municipal
3. Preferred Stock
a. Hybrid security with some features of both bonds and stocks
B. International Bond Investing – Investors should be aware that there is a substantial fixed
income market outside Canada that offers additional opportunity for diversification.
1. Eurobond
a. An international bond denominated in a currency not native to the country where
it is issued
2. Maple Bonds
1. Common stock
a. represents ownership of a firm
2. Common Stock Classifications
a. Direct purchase or sale of foreign shares
D. Special Equity Instruments: Options – the right to buy or sell common stock of a
company at a specified price within a certain period of time
1. Warrants
2. Puts and Calls
F. Investment Companies
1. Money Market Funds
2. Bond Funds
6. Exchange-Traded Funds (ETFs)
G. Real Estate
1. Real Estate Investment Trusts (REITS) – Investment funds that invest in various real
estate properties
a. Construction and development trusts – Lend money required by builders during
2. Direct Real Estate Investment
a. Raw Land
b. Land Development
c. Rental Properties
H. Low Liquidity Investments
1. Antiques
III. World Portfolio Performance
1. Performance of stocks and bonds examined for period 1993 – March 2009
2. Annual rates of return, standard deviation of returns, and systematic risk (beta)
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Appendix 3 – A Review of Bond Categories and Terminology
a. Senior Secured Bonds
Mortgage Bonds
Collateral Trust Bonds
Equipment Trust Certificates
b. Debentures