券和组合课后习题答案：sm03

CHAPTER 3 SELECTING INVESTMENTS IN A GLOBAL MARKET Answers to Questions 1. The major advantage of investing in common stocks is that generally an investor would earn a higher rate of return than on corporate bonds. Also, while the return on bonds is pre-specified and fixed, the return on common stocks can be substantially higher if the investor can pick a winner - i.e., if the company9s perance turns out to be better than current market expectations. The main disadvantage of common stock ownership is the higher risk. While the income on bonds is certain except in the extreme case of bankruptcy, the return on stocks will vary depending upon the future perance of the company and could well be negative. 2. The three factors are 1 Limiting oneself to the U.S. securities market would imply effectively ignoring more than 50 of the world securities market. While U.S. markets are still the largest single sector, foreign markets have been growing in absolute and relative size since 1969.」」」 2 The rates of return available on non-U.S. securities often have substantially exceeded those of U.S. securities. 3 Diversification with foreign securities reduces portfolio risk. 3. International diversification reduces portfolio risk because of the low correlation of returns among the securities from different countries. This is due to differing international trade patterns, economic growth, fiscal policies, and monetary policies among countries. 4. There are different correlations of returns between securities from the U.S. and alternate countries because there are substantial differences in the economies of the various countries at a given time in terms of inflation, international trade, monetary and fiscal policies and economic growth. 5. The correlations between U.S. stocks and stocks for different countries should change over time because each country has a fairly independent set of economic policies. Factors influencing the correlations include international trade, economic growth, fiscal policy and monetary policy. A change in any of these variables will cause a change in how the economies are related. For example, the correlation between U.S. and Japanese stock will change as the balance of trade shifts between the two countries. 6. The major risks that an investor must consider when investing in any bond issue are business risk, financial risk and liquidity risk. Additional risk associated with foreign bonds, such as Japanese or German bonds, are exchange rate risk and country risk. Country risk is not a major concern for Japanese or German securities. Exchange rate risk is the uncertainty that arises from floating exchange rates between the U.S. dollar and the Japanese yen or Deutsch mark. 7. The additional risks that some investors believe international investing introduces include foreign exchange risk and country risk. For example, the domestic return on Canada bonds of 10.36 exceeded the U.S. return of 9.78. The