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Portfolios Management

Selecting Investments
in a Global Market
– The Case for Global Investments
– Global Investment Choices
Chapter 3

– Historical Risk-Returns on Alternative


Investments
Growing Investment Opportunities
• More investment instruments available in the
financial markets as a results of technological
advances and new regulations
• Ability to invest from a global perspective
thanks to the globalization or integration of
domestic and foreign financial markets
• Investment vehicles with a variety of maturities,
risk-return characteristics, and cash flow
patterns being spawned due to competition
and deregulations in the financial sector

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The Case for Global Investments
• Three reasons U.S. investors should think of
constructing global investment portfolios
– Ignoring foreign markets can substantially reduce
the investment choices for U.S. investors
– The rates of return on non-U.S. securities often
have substantially exceeded those for U.S.-only
securities
– The low correlation between U.S. stock markets
and many foreign markets can help to substantially
reduce portfolio risk

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The Case for Global Investments
• Relative Size of U.S. Financial Markets
– Overall value of the securities available in world
capital market has increased from $2.3 Trillion in
1969 to $103 Trillion in 2006 and the U.S. portion
has declined to less than half.
– The share of the U.S. in world stock and bond
markets has dropped from about 65 percent of the
total in 1969 to about 46 percent in 2006.
– The growing importance of foreign securities in
world capital markets is likely to continue.
– Exhibit 3.1 shows the breakdown of securities in
the global capital market.
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Exhibit 3.1

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The Case for Global Investments
• Rates of Return on U.S. and Foreign Securities
– Global Bond-Market Return:
• From 1999–2007, the return performance of the U.S.
bond market ranked fifth out of the six countries
when the returns are measured in U.S. dollar.
• The better performance of the non-U.S. markets is
partly due to the weakened dollar in this time frame
• See Exhibit 3.2
– Global Equity-Market Return
• From 2003 through 2006, the United States’ average
rank in annual return measured in U.S. dollar was
29.5 out of 34 countries.

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Exhibit 3.2

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The Case for Global Investments
• Risk of Combined Country Investments
– Diversification with foreign securities can help reduce
portfolio risk because foreign markets have low
correlation with U.S. capital markets.
– The correlation of returns between a single pair of
countries changes over time because the factors
influencing the correlation change over time.
– Diversified portfolios reduce variability of returns over
time.
– Correlation coefficients measure diversification
contribution.

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The Case for Global Investments
• Global Bond Portfolio Risk
– Low positive correlation (Exhibit 3.4)
• For a U.S. investor, the average correlation between
foreign bond return and U.S. bond return in U.S.
dollars is about 0.63 from 1988 to 2006.
• The U.S.–Canada correlation is 0.74, whereas the
U.S.–Japan correlation is only 0.38.
– Opportunities for U.S. investors to reduce risk
– Correlation changes over time
– Adding non-correlated foreign bonds to a portfolio of
U.S. bonds increases the rate of return and reduces
the risk of the portfolio. (Exhibit 3.5)
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Exhibit 3.4

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Exhibit 3.5

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The Case for Global Investments
• Global Equity Portfolio Risk
– Low positive correlation (Exhibit 3.6)
• The correlation of world equity markets resembles
that for bonds; however, the average correlation
between U.S. and foreign markets is about 0.56,
lower than that for bonds from 1988 to 2006.
• Again, the U.S.–Canada correlation is 0.73, whereas
the U.S.–Japan correlation is only 0.34.
– Opportunities to reduce risk of a stock portfolio by
including foreign stocks, as illustrated in Exhibit 3.7.

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Exhibit 3.6

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Exhibit 3.7

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Global Investment Choices
• Fixed-Income Investments
– Bonds and preferred stocks
• Equity Investments
• Special Equity Instruments
– Warrants and options
• Futures Contracts
• Investment Companies
• Real Assets
• Low Liquidity Investments

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Fixed-Income Investments
• Basic concepts of fixed-income investments
– Contractual payment schedule
– Recourse varies by instrument
– Bonds
• Investors are lenders
• Expect interest payment and return of principal
– Preferred stocks
• Dividends require board of directors approval

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Fixed-Income Investments
• Savings Accounts
– Fixed earnings
– Convenient
– Liquid and low risk
– Low rates
– Certificates of Deposit (CDs)
– Money Market Certificates
• Compete against Treasury bills (T-bills)
• Minimum $10,000
• Minimum maturity of six months
• Redeemable only at bank of issue
• Penalty if withdrawn before maturity
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Capital Market Instruments
• Fixed income obligations that trade in
secondary market
• U.S. Treasury securities
• U.S. Government agency securities
• Municipal bonds
• Corporate bonds
– Secured bonds
– Debentures
– Subordinated bonds
– Income bonds
– Convertible bonds
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U.S. Treasury Securities
• Issued by the U.S. Treasury
• Depending on the maturity, they are:
– Bills with a maturity less than 1 year
– Notes with a maturity in 1 - 10 years
– Bonds with a maturity over 10 years
• Highly liquid
• Essentially free of credit risk: They are
backed by the full faith and credit of the U.S.
Government

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U.S. Government Agency Securities
• Sold by government agencies
– Federal National Mortgage Association (FNMA or
Fannie Mae)
– Federal Home Loan Bank (FHLB)
– Government National Mortgage Association
(GNMA or Ginnie Mae)
– Federal Housing Administration (FHA)
• Not direct obligations of the Treasury
– Still considered almost default-free and fairly
liquid

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Municipal Bonds
• Issued by state and local governments
usually to finance infrastructural projects.
• Exempt from taxation by the federal
government and by the state that issued the
bond, provided the investor is a resident of
that state.
• Two types:
– General obligation bonds (GOs)
– Revenue bonds

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Municipal Bonds

• 1978-2010 中国地方债

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地方政府为什么要借债

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地方不允许发债,为什么会有地方债?

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地方债务构成

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中国地方债务有多少?

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债务支出投向类别

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地方融资平台资产收益率和利息对比

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• 地方政府没有钱,但有土地。土地开发后收益
丰厚。

• 但随着地产泡沫累积,出让金能继续支持财政
开支吗?一旦房价下跌,土地担保贷款会不会
出现问题。
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借新还旧的地方债

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中国地方债务置换
• 2015.3.12:财政部近期下达地方存量债务1万
亿元置换债券额度(占2015到期政府债务53.8%
) ,允许地方把一部分到期的高成本债务转换
成地方政府债券
• 负担减轻:政府债券利率一般较低,一年可减
少利息负担400亿~500亿元
• 部分置换:一部分地方债务仍由企业和地方自
身通过市场化的方式来解决。
• 之前已有银行对一些地方政府融资平台到期贷
款展期,避免出现违约潮。

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消除了对政府债务普遍违约的担忧
• 本质:地方债换个债务方式展期,与纯粹展期
不同,有重组性质。
• 债权债务关系发生变化:地方政府与银行等金
融机构、地方政府与企业(BT模式)之间,变
为地方政府与债券机构投资者之间。
• 债息有所降低:以低息债置换高息债,给地方
政府喘息的时间,减轻地方负担。属于银行贷
款的,收益下降,但比起违约来说总是好事,
• 到底谁来购买如此庞大的低息地方债?地方置
换债券发行与库款调度结合起来;银行、保险
和基金。
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如果地方债情况不能好转

• 国家统计局:今年1-2月,全国土地购置面积同
比下降了三成;土地成交价款699亿元,同比下
滑三成,卖地收入剧减严重影响财政收入。经
济增速下滑,地方政府税费收入受到冲击。
• 无论央行还是银行等金融机构埋单,最终会转
嫁给利益链的底端:民间中小投资者,通过理
财、储蓄等形式承担成本。
• 长期来看,规范市场化运作是解决之道:有盈
利的地方项目进行市场化处置,可以收费的公
益型项目由投融资平台运作,主要由地方政府
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发行专项债券融资或PPP模式支持。
Corporate Bonds
• Basic Concepts
– Issued by a corporation
– Fixed income
– Credit quality measured by ratings
– Maturity
– Features
• Indenture
• Call provision
• Sinking fund
– Seniority categories

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Corporate Bonds
• Secured bonds(担保债权)
– Senior secured bonds
• Most senior bonds in capital structure and have the
lowest risk of default
– Mortgage bonds
• Secured by liens on specific assets
– Collateral trust bonds
• Secured by financial assets
– Equipment trust certificates
• Secured by transportation equipment

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Corporate Bonds
• Debentures(信用债券)
– Unsecured promises to pay interest and principal
– In case of default, debenture owner can force
bankruptcy and claim any unpledged assets to
pay off the bonds
• Subordinated bonds(次级债券)
– Unsecured like debentures, but holders of these
bonds may claim assets after senior secured and
debenture holders claims have been satisfied

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Corporate Bonds
• Income bonds收入债券
– Interest payment contingent upon earning
sufficient income
– If subsequently earned, it must be paid off
– Riskier than debenture bonds
• Convertible bonds(可转换债券)
– Offer the upside potential of common stock and
the downside protection of a bond
– Usually have lower interest rates

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Corporate Bonds

• Warrants(权证)
– Allows bondholder to purchase the firm’s common
stock at a fixed price for a given time period
– Interest rates usually lower on bonds with
warrants attached
• Zero coupon bond(零息票债券)
– Offered at a deep discount from the face value
– No interest during the life of the bond, only the
principal payment at maturity

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Preferred Stock
• Hybrid security
• Fixed dividends
• Dividend obligations are not legally binding,
but must be voted on by the board of
directors to be paid
• Most preferred stock is cumulative
• Credit implications of missing dividends
• Corporations may exclude 80% of dividend
income from taxable income

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International Bond Investing
• Investors should be aware that there is a very
substantial fixed income market outside the
United States that offers additional opportunity
for diversification and returns.
• Bond identification characteristics
– Country of origin
– Location of primary trading market
– Home country of the major buyers
– Currency of the security denomination

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International Bond Investing
• Eurobond(欧洲债券)
– An international bond denominated in a currency
other than the country where it is issued
• Yankee bonds(扬基债券)
– Sold in the United States and denominated is U.S.
dollars, but issued by foreign corporations or
governments
– Eliminates exchange risk to U.S. investors
• International domestic bonds (国际本土债券)
– Sold by issuer within its own country in that
country’s currency

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Equity Investments
• Common Stock (普通股股票)
– Represents ownership of a firm
– Investor’s return tied to the performance of the
company and may result in loss or gain
• Common Stock Classifications
– Industrial: manufacturers of automobiles,
machinery, chemicals, beverages
– Utilities: electrical power companies, gas suppliers,
water industry
– Transportation: airlines, truck lines, railroads
– Financial: banks, savings and loans, credit unions

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Acquiring Foreign Equities
• American Depository Receipts (ADRs)(美国
存托凭证)
– Easiest way to directly acquire foreign shares
– Certificates of ownership issued by a U.S. bank
that represents indirect ownership of a certain
number of shares of a specific foreign firm on
deposit in a U.S. bank in the firm’s home country
– Buy and sell in U.S. dollars
– Dividends in U.S. dollars
– May represent multiple shares
– Listed on U.S. exchanges
– Very popular, 356 out of 462 on NYSE in 2006
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Acquiring Foreign Equities
• Purchase of American Shares
– Issued in the United States by transfer agent on
behalf of a foreign firm
– Higher expenses
– Limited availability
• Direct Purchase of Foreign Shares
– In the foreign firms’ own country
– Listed on a foreign stock exchange outside the
home country (e.g., French firms on LSE)
– Listed on a U.S. stock exchange

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Acquiring Foreign Equities
• Global Mutual Funds or ETFs
– Global funds: Invest in both U.S. and foreign
stocks
– International funds: Invest mostly outside the U.S.
– Funds can specialize
• Diversification across many countries
• Concentrate in a segment of the world
• Concentrate in a specific country
• Concentrate in types of markets
– Exchange-traded funds or ETFs are a recent
innovation in the world of index products
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Special Equity Instruments: Options
• These are equity-derivative securities which
have a claim on the common stock of a firm.
• Options are rights to buy or sell common stock
or other underlying assets at a stated price for
a period of time.
– Puts are options to sell
– Calls are options to buy
• Warrants
– An options issued by a company giving the holders
the right to buy its common stock
– Normally issued with bonds

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Futures Contracts
• Exchange of a particular asset at a specified
delivery date for a stated price paid at the
time of delivery
• Deposit (10% margin) is made by buyer at
contract to protect the seller
• Commodities trading is largely in futures
contracts
• Current price depends on expectations

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Futures Contracts
• Financial Futures
– Recent development of contracts on financial
instruments such as T-bills, Treasury bonds, and
Eurobonds
– Traded mostly on Chicago Mercantile Exchange
(CME) and Chicago Board of Trade (CBOT)
– Allow investors and portfolio managers to protect
against volatile interest rates
– Currency futures allow protection against changes
in exchange rates
– Various stock futures on market indexes such as
the S&P 500 and Value Line Index
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Investment Companies
• Rather than buy individual securities directly
from the issuer they can be acquired
indirectly through shares in an investment
company
• Investment companies sell shares in itself
and uses proceeds to buy securities
• Investors own part of the portfolio of
investments

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Investment Companies
• Money Market Funds(货币市场基金)
– Acquire high-quality, short-term investments
– Yields are higher than normal bank CDs
– Typical minimum investment is $1,000
– No sales commission charges
QD
基金类型与占比
– Withdrawal is by 另类投资基
check with no penalty 金
0.11%
– Investments usually
股票型基金
are not insured 货币市场型
28%

基金
48% 混合型基
15%
3-50 债券型基金
8%
Investment Companies
• Money Market Funds(货币市场基金)
• The total value of these funds reached more than $2.5
trillion in 2007

数量合计 份额 资产净值
基金类型 占比(%) 占比(%) 占比(%)
(只) (亿份) (亿)
股票型基金 724 36.68 11,162 25.78 12,685 27.68
混合型基金 432 21.88 6,483 14.98 7,048 15.38
债券型基金 479 24.27 3,131 7.23 3,572 7.79
货币市场型基金 236 11.96 21,831 50.42 21,996 47.99
另类投资基金 11 0.56 52 0.12 51 0.11
QDII基金 92 4.66 635 1.47 481 1.05

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Investment Companies
• Bond Funds (债券基金)
– Invest in long-term government, corporate, or
municipal bonds
– Bond funds vary in bond quality from the risk-free
government bonds to the high-yield or junk bonds
– Expected returns also differ reflecting the risk
level of bonds in the fund

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Investment Companies
• Common Stock Funds (普通股基金)
– Many different funds with varying stated
investment objectives
• Aggressive growth, income, precious metals,
international stocks
– Offer diversification to smaller investors
– Sector funds concentrate in an industry
– International funds invest outside the United
States
– Global funds invest in the U.S. and other
countries

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Investment Companies
• Balanced Funds (平衡型基金)
– Invest in a combination of stocks and bonds
depending on their stated objectives
• Index Funds (指数基金)
– These are mutual funds created to track the
performance of a market index like the S&P 500
– Appeal to passive investors who want to simply
experience returns equal to some market index
– Numerous non-stock indexes including various
bond indexes have been created

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Investment Companies
• Exchange-Traded Funds (ETFs) (交易所交
易基金)
– These are depository receipts for a portfolio of
securities deposited at a financial institution in a
unit trust that issues a certificate of ownership for
the portfolio of stocks
– The stocks in a portfolio are those in an index like
the S&P 500 and dozens of country or industry
indexes
– ETFs can be bought and sold continuously on an
exchange like common stock
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Real Estate
• Real Estate Investment Trusts (REITs) (房
地产投资信托)
– Investment fund that invests in a variety of real
estate properties, similar to a stock or bond
mutual fund
– Construction and development trusts provide
builders with construction financing
– Mortgage trusts provide long-term financing for
properties
– Equity trusts own various income-producing
properties

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Real Estate
• Direct Real Estate Investment (房地产直接投
资)
– Purchase of a home
– Purchase of raw land
• Intention of selling in future for a profit
• Ownership provides a negative cash flow due to
mortgage payments, taxes, and property
maintenance
– Land Development
• Divide the land into individual lots
• Build houses or a shopping mall on it
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• Requires capital, time, and expertise
Real Estate
• Rental Property (可租赁房产)
– Acquire apartment buildings or houses with low
down payments
– Derive enough income from the rents to pay the
expenses of the structure, including the mortgage
payments, and generate a good return
– Rental property provides a cash flow and an
opportunity to profit from the sale of the property

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Low-Liquidity Investments
• Basic Concepts
– Some investments don’t trade on securities
markets
– Lack of liquidity keeps many investors away
– Auction sales create wide fluctuations in prices
– Without notional markets, dealers incur high
transaction costs
– Some may consider them more as hobbies than
investments

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Low-Liquidity Investments
• Antiques(古董)
– Dealers buy at estate sales, refurbish, and sell
at a profit
– Serious collectors may enjoy good returns
– Individuals buying a few pieces to decorate a
home may have difficulty overcoming
transaction costs to ever enjoy a profit them
more as hobbies than investments

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Low-Liquidity Investments
• Art (艺术品)
– Investment requires substantial knowledge of art
and the art world
– Acquisition of work from a well-known artist
requires large capital commitments and
patience
– High transaction costs
– Uncertainty and illiquidity

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Low-Liquidity Investments
• Coins and Stamps (钱币和邮票)
– Enjoyed by many as hobby and as an
investment
– Market is more fragmented than stock market,
but more liquid than art and antiques markets
– Price lists are published weekly and monthly
– Grading specifications aid sales
– Wide spread between bid and ask prices

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Low-Liquidity Investments
• Diamonds (珠宝)
– Can be illiquid
– Grading determines value, but is subjective
– Investment-grade gems require substantial
investments
– No positive cash flow until sold
– Costs of insurance, storage, and appraisal

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Historical Risk-Returns on Investments
• World Portfolio Performance
– Reilly and Wright (2004) examined the
performance of various investment alternatives
from the United States, Canada, Europe, Japan,
and the emerging markets for the period 1980-
2001, as shown in Exhibit 3.8
– Asset Returns and Total Risk
• The expected relationship between annual rates of
return and total risk (standard deviation) of these
securities was confirmed

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Historical Risk-Returns on Investments
– Return and Systematic Risk
• The systematic risk measure (beta) did a better job
of explaining the returns during the period than did
the total risk measure
• The beta risk measure that used the Brinson index
as a market proxy was somewhat better than the
beta that used the S&P 500 Index
• See Exhibit 3.9
– Correlations between Asset Returns
• U.S. equities have a reasonably high correlation with
Canadian and U.K. stocks but low correlation with
emerging market stocks and Japanese stocks
• U.S. equities show almost zero correlation with world
government bonds, except U.S. bonds
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Exhibit 3.9

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Historical Risk-Returns on Investments
• Art and Antiques
– Market data is limited
– Results vary widely, and change over time, making
generalization impossible, but showing a
reasonably consistent relationship between risk
and return
– Correlation coefficients vary widely, allowing for
great diversification potential
– Liquidity is still a concern

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Historical Risk-Returns on Investments
• Real Estate
– Returns are difficult to derive due to lack of data
– Residential shows lower risk and return than
commercial real estate
– REITs have shown higher returns with lower risk
than stock in short-term but lower return with lower
risk than stock in long-term
– Negative correlation between residential and farm
real estate and stocks
– Low positive correlation between commercial real
estate and stocks
– Potential for diversification
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The Internet Investments Online

• http://www.site-by-site.com
• http://www.moneycafe.com
• http://www.emgmkts.com
• http://www.law.duke.edu/globalmark
• http://www.lebenthal.com
• http://www.sothebys.com

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