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Where to Invest? The growth of the global capital market has created opportunities for international businesses, individuals, and organizations that wish to borrow and/or invest money. Investors wish to limit their risk and to find attractive returns. Investors have basic choices about whether to invest domestically or internationally. They must also choose the kinds of investments to make. With so many options available to investors, they must understand their options to make the best choices. By holding a diverse portfolio of stocks and bonds in different nations, an investor can reduce total risk to a lower level than can be achieved in a purely domestic setting. Foreign exchange risk, however, is a complicating factor. The global capital market will continue to increase in both importance and degree of integration over the next decade. Read the overview below and complete the activities that follow. The choices between whether to invest domestically or internationally can affect the future earnings and the safety of the capital. The investor - individual, firm, or organization - should consider carefully the options available. With greater access to information and financial opportunities, the investor needs to make a number of choices about where to invest his or her money. By looking at the range of options and assessing the opportunities, an integrated approach will emerge. Answer the following questions, and then confirm that you've developed a good approach. It happens every once in a great while. You bought the winning ticket in a lottery, and you've suddenly got a lot of money to invest - millions. Your business has been successful, and it really doesn't need a major infusion. Your strategic plan is bringing the return you expected. You have been considering different options suggested by financial advisors, and you've come down to a basic decision you need to make. Should you invest domestically or internationally? The domestic stock market has been highly volatile, and it no longer seems as attractive or secure as it once did. On the other hand, the international market has so many options for investing, and here, too, the market may not be as secure as it once was. You are willing to tolerate a fair amount of risk since the principal you have to invest is essentially a windfall. You don't want to waste it. Where can you find the best return? 1. By using the global capital market, investors have _ _ than in a purely domestic capital market. A.) A much wider range of investment opportunities B.) fewer concerns about translation risks C.) A much narrower range of investment opportunities 2. By , the losses incurred when some stocks fail to live up to their promises are offset by the gains enjoyed when other stocks exceed their promise. A.) Holding a variety of stock in a diversified portfolio, especially internationally B.) Investing primarily in bonds C.) Keeping the majority of the funds in a municipal bonds and government treasury notes 3. _ _ _ risk refers to movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy. This risk is the level of non-diversifiable risk in an economy. A.) Domestic B.) International C.) Systematic 4. Research by Solnik suggests that a fully diversified US portfolio is only about 27 percent as risky as a typical individual stock. By , an investor can reduce the level of risk even further. A.) Diversifying a portfolio internationally B.) Eliminating all but the highest performing domestic stocks C.) Focusing on a few basic domestic industries 5. tend to counteract the risk-reducing effects on international portfolio diversification. A.) The volatile exchange rates associated with the current floating exchange rate regime B.) The differences in tax regimes C.) The difficulties of repatriationg in countries with nonconvertible currencies