Multinational Financial Management

International Portfolio Investment

Capital now flows at the speed of light across national borders and into markets once deemed impregnable.

CITICORP ANNUAL REPORT (1991)

LEARNING OBJECTIVES

• To describe the risks and advantages of international investing
• To explain how international investing can allow investors to achieve a better risk-return tradeoff than can investing solely in U.S. securities
• To identify the barriers to investing overseas
• To describe the various ways in which U.S. investors can diversify into foreign securities
• To explain why investing in foreign stocks and bonds provides a better risk-return tradeoff than investing in either foreign stocks or bonds alone
• To calculate the currency risk associated with investing in securities issued in different markets and denominated in various currencies
• To calculate the return associated with investing in securities issued in different markets and denominated in various currencies

There was a time when investors treated national boundaries as impregnable barriers, limiting their reach and financial options to predominantly domestic and regional markets. Times have changed. Just as companies and consumers are going global, so are increasing numbers of investors. American investors are buying foreign stocks and bonds, and foreign investors are purchasing U.S. securities. This chapter examines the nature and consequences of ...