Griffith University 3208AFE Portfolio Management readings Lecture note.pptVIP

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Griffith University 3208AFE Portfolio Management readings Lecture note.ppt

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Griffith University 3208AFE Portfolio Management readings Lecture note

Exhibit 3.1 The Case for Global Investments In some periods, rates of return available on foreign securities have often exceeded Australian securities due to higher growth rates in foreign countries, especially the emerging markets. The Case for Global Investments Diversification with foreign securities can help reduce portfolio risk because foreign markets may have low correlation with Australian capital markets Summary on Global Investing Relatively high rates of return combined with low correlation coefficients indicate that adding foreign stocks and bonds to an Australian portfolio will reduce risk and may increase its average return N.B., Currency risk cannot be ignored! Question Time * * A 76-year examination of past capital market returns provides historical insight into the performance characteristics of various asset classes. This graph illustrates the hypothetical growth of a $1 investment in four traditional asset classes, as well as inflation, over the time period December 31, 1925 through December 31, 2001. Large and small company stocks have provided the largest increase in wealth over the past 76 years. The fixed-income investments provided only a fraction of the growth provided by stocks. As illustrated in this image, stocks produced greater and a higher ending wealth value than that of fixed-income investments. However, these higher returns are associated with much greater volatility (risk). Furthermore, small company stocks may be subject to a higher degree of market risk than large company stocks. Source: Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard Poor’s 500?, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Treasury Bills—30-day U.S. Tre