How do investors weigh the costs and benefits of owning investments and make decisions to build portfolios that will provide the best risk-return combinations? To help individual or insti- tutional investors answer this question, financial theorists have examined extensive data to pro- vide information on the return and risk characteristics of various investments.
There have been numerous studies of the historical rates of return on common stocks, and there has been a growing interest in bonds. Because inflation has been so pervasive, many stud- ies include both nominal and real rates of return on investments. Still other investigators have examined the performance of such assets as real estate, foreign stocks, art, antiques, and com- modities. The subsequent review of these results should help you to make decisions on building your investment portfolio and on the allocation to the various asset classes.
A set of studies by Ibbotson and Sinquefield (I&S) examined historical nominal and real rates of return for seven major classes of assets in the United States: (1) large-company common stocks, (2) small-capitalization common stocks,13(3) long-term U.S. government bonds, (4) long-term corporate bonds, (5) intermediate-term U.S. government bonds, (6) U.S. Treasury bills, and (7) consumer goods (a measure of inflation).14For each asset, the authors calculated total rates of return before taxes or transaction costs.
Stocks, Bonds, and T-Bills
These investigators computed geometric and arithmetic mean rates of return and computed nine series derived from the basic series. Four of these series were net returns reflecting differ- ent premiums: (1) a risk premium, which I&S defined as the difference in the rate of return that investors receive from investing in large-company common stocks rather than in risk-free U.S. Treasury bills; (2) a small-stock premium, which they defined as the return on small- capitalization stocks minus the return on large-company stocks; (3) a horizon premium, which they defined as the difference in the rate of return received from investing in long-term govern- ment bonds rather than short-term U.S. Treasury bills; and (4) a default premium, which they defined as the difference between the rates of return on long-term risky corporate bonds and long-term risk-free government bonds. I&S also computed the real inflation-adjusted rates of return for the six major classes of assets (not including inflation).
A summary of the rates of return, risk premiums, and standard deviations for the basic and derived series appears in Exhibit 3.11. As discussed in Chapter 1, the geometric means of the rates of return are always lower than the arithmetic means of the rates of return, and the differ- ence between these two mean values increases with the standard deviation of returns.
During the period from 1926 to 2001, large-company common stocks returned 10.7 percent a year, compounded annually. To compare this to other investments, the results show that com- mon stock experienced a risk premium of 6.6 percent and inflation-adjusted real returns of 7.4 percent per year. In contrast to all common stocks, the small-capitalization stocks (which are represented by the smallest 20 percent of stocks listed on the NYSE measured by market value) experienced a geometric mean return of 12.5 percent, which was a premium compared to all common stocks of 1.6 percent.
HISTORICALRISK-RETURNS ONALTERNATIVEINVESTMENTS 91
BASIC AND DERIVED SERIES: HISTORICAL HIGHLIGHTS (1926–2001)
ANNUALGEOMETRIC ARITHMETICMEAN STANDARDDEVIATION
SERIES MEANRATE OFRETURN OFANNUALRETURNS OFANNUALRETURNS
Large-company stocks 10.7% 12.7% 20.2%
Small-capitalization stocks 12.5 17.3 33.2
Long-term corporate bonds 5.8 6.1 8.6
Long-term government bonds 5.3 5.7 9.4
Intermediate-term government bonds 5.3 5.5 5.7
U.S. Treasury bills 3.8 3.9 3.2
Consumer price index 3.1 3.1 4.4
Equity risk premium 6.6 8.6 19.9
Small-stock premium 1.6 3.3 18.4
Default premium 0.4 0.5 3.1
Horizon premium 1.4 1.8 8.5
Large-company stock—inflation adjusted 7.4 9.4 20.2
Small-capitalization stock—inflation adjusted 8.7 13.3 32.1
Long-term corporate bonds—inflation adjusted 2.6 3.1 9.8
Long-term government bonds—inflation adjusted 2.2 2.7 10.5
Intermediate-term government bonds—inflation adjusted 2.2 2.4 6.9
U.S. Treasury bills—inflation adjusted 0.7 0.8 4.1
EXHIBIT 3.11
Source: Stocks, Bonds, Bills, and Inflation®2002 Yearbook, © Ibbotson Associates, Inc. Based on copyrighted works by Ibbotson and Sinquefield. All rights reserved. Used with permission.
Although large-cap common stocks and small-capitalization stocks experienced higher rates of return than the other asset groups, their returns were also more volatile as measured by the standard deviations of annual returns.
Long-term U.S. government bonds experienced a 5.3 percent annual return, a real return of 2.2 percent, and a horizon premium (compared to Treasury bills) of 1.4 percent. Although the returns on these bonds were lower than those on stocks, they were also far less volatile.
The annual compound rate of return on long-term corporate bonds was 5.8 percent, the default premium compared to U.S. government bonds was 0.4 percent, and the inflation- adjusted return was 2.6 percent. Although corporate bonds provided a higher return, as one would expect, the volatility of corporate bonds was slightly lower than that experienced by long-term government bonds.
The nominal return on U.S. Treasury bills was 3.8 percent a year, whereas the inflation- adjusted return was 0.7 percent. The standard deviation of nominal returns for T-bills was the lowest of the series examined, which reflects the low risk of these securities and is consistent with the lowest rate of return.
This study reported the rates of return, return premiums, and risk measures on various asset groups in the United States. As noted, the rates of return were generally consistent with the uncertainty (risk) of annual returns as measured by the standard deviations of annual returns.
Expanding this analysis from domestic to global securities, Reilly and Wright examined the performance of numerous assets, not only in the United States, but around the world.15Specif- ically, for the period from 1980 to 1999, they examined the performance of stocks, bonds, cash (the equivalent of U.S. T-bills), real estate, and commodities from the United States, Canada, Europe, Japan, and the emerging markets. He computed annual returns, risk measures, and correlations among the returns for alternative assets. Exhibit 3.12 shows the geometric and arithmetic average annual rates of return, the standard deviations of returns, and the system- atic risk (beta) for the 20-year period.
Asset Return and Risk The results in Exhibit 3.12 generally confirm the expected rela- tionship between annual rates of return and the risk of these securities. The riskier assets—those that had higher standard deviations—experienced higher returns. For example, the MSCI, EAFE, and Frankfurt FAZ indexes had relatively high returns (16.74 and 14.31 percent) and very large standard deviations (20.64 and 23.48 percent). It is not a surprise that the highest-risk asset class (without commodities) was emerging market stock at 28.87 percent, whereas risk-free U.S. cash equivalents (one-year government bonds) had low returns (8.14 percent) and the smallest stan- dard deviation (3.78 percent).
Relative Asset Risk The coefficients of variation (CVs), which measure relative variability, indicated a wide range of values. The lowest CV was experienced by the low-risk one-year gov- ernment bond. Japanese stocks had the highest CV value because of their large standard devia- tion and relatively low returns during this period. The CVs for stocks ranged from 0.69 to 2.74, with U.S. stocks toward the low end due to the strong rates of return during this period. Finally, the Brinson Global Security Market index had a very low CV (0.63), demonstrating the benefits of global diversification.
World Portfolio Performance
15Frank K. Reilly and David J. Wright, “An Analysis of Global Capital Market Risk-Adjusted Returns,” Mimeo (July 2001).
HISTORICALRISK-RETURNS ONALTERNATIVEINVESTMENTS 93 SUMMARY RISK-RETURN RESULTS FOR ALTERNATIVE CAPITAL MARKET ASSETS:
1980–1999
ARITHMETIC GEOMETRIC STANDARD COEFFICIENT BETA
INDEX RETURN RETURN DEVIATION OFVARIATIONa 20 YEARSb
S&P 500 18.41 17.71 12.69 0.69 1.34
Ibbotson Small Cap 16.89 15.46 17.68 1.05 1.37
Wilshire 5000 17.77 17.02 13.04 0.73 1.38
Russell 1000 18.04 17.30 12.97 0.72 1.36
Russell 1000 Value 17.45 16.78 12.33 0.71 1.22
Russell 1000 Growth 18.93 17.82 16.04 0.85 1.49
Russell 2000 15.10 13.83 16.72 1.11 1.52
Russell 2000 Value 16.26 14.92 17.01 1.05 1.27
Russell 2000 Growth 14.25 12.50 20.05 1.41 1.77
Russell 3000 17.72 16.99 12.92 0.73 1.37
Russell 3000 Value 17.31 16.63 12.36 0.71 1.22
Russell 3000 Growth 18.44 17.33 15.98 0.87 1.52
IFC Emerg. Mkt. 12.43 8.79 28.87 2.32 0.76
MSCI EAFE 16.74 14.98 20.64 1.23 1.22
Toronto Stock Exch. 300 8.94 7.98 14.36 1.61 1.27
Financial Times All Shares 14.80 14.15 11.64 0.79 1.07
Frankfurt (FAZ) Index 14.31 11.93 23.48 1.64 0.98
Nikkei Index 7.66 5.44 20.98 2.74 1.00
Tokyo Stk. Exch. Index 9.34 6.83 22.80 2.44 0.85
M-S World Index 16.47 14.83 19.67 1.19 1.27
Brinson GSMI 14.63 14.26 9.23 0.63 1.00
LB Government Bond 9.96 9.71 7.35 0.74 0.23
LB Corporate Bond 10.96 10.53 9.92 0.91 0.35
LB Aggregate Bond 10.27 9.98 8.14 0.79 0.27
LB High-Yield Bond 13.10 12.47 12.18 0.93 0.43
ML World Gov’t Bondc 9.31 9.07 7.30 0.78 0.18
ML World Gov’t Bond except U.S. 10.72 10.10 11.91 1.11 0.27
Wilshire Real Estate 11.18 9.78 17.76 1.59 0.85
Goldman Commodities Index 9.23 7.22 20.07 2.17 0.07
Goldman Energy Commodities Sub-Indexd 16.84 10.34 38.65 2.29 –0.24
Goldman Non-Energy Commodities Sub-Index 5.92 5.06 13.17 2.23 0.23
Goldman Ind. Metals Commodities Sub-Index 12.66 6.87 42.49 3.36 0.41
Goldman Metals Commodities Sub-Index –2.59 –3.68 14.20 –5.48 0.34
Goldman Agriculture Commodities Sub-Index 2.68 1.10 17.65 6.60 0.20
Goldman Livestock Commodities Sub-Index 10.71 9.05 19.04 1.78 0.22
Treasury-Bill (1 year) 8.14 8.07 3.78 0.46 0.05
Inflation 4.03 4.00 2.54 0.63 –0.02
EXHIBIT 3.12
aCoefficient of Variation = Standard Deviation / Arithmetic Mean of Return
bThe Beta is calculated using monthly rates of return for 20 years (240 observations) of the Brinson GSMI.
cStatistics for the ML World Government Bond indexes were based upon 1986–1999 data only.
dStatistics for the Goldman Energy Commodities Sub-Index were based upon 1983–1999 data only.
Source: Frank K. Reilly and David J. Wright, “An Analysis of Global Capital Market Risk-Adjusted Returns,” Mimeo (July 2001).
Correlations between Asset Returns Exhibit 3.13 is a correlation matrix of selected U.S. and world assets. The first column shows that U.S. equities have a reasonably high corre- lation with Canadian and U.K. stocks (.769 and .641) but low correlation with emerging market stocks and Japanese stocks (.347 and .306). Also, U.S. equities show almost zero correlation with world government bonds except U.S. bonds (.005). Recall from our earlier discussion that you can use this information to build a diversified portfolio by combining those assets with low pos- itive or negative correlations.
Unlike financial securities, where the results of transactions are reported daily, art and antique markets are fragmented and lack any formal transaction reporting system. This makes it difficult to gather data. The best-known series that attempt to provide information about the changing value of art and antiques were developed by Sotheby’s, a major art auction firm. These value indexes cover 13 areas of art and antiques and a weighted aggregate series that is a combination of the 13.
Reilly examined these series for the period from 1976 to 1991 and computed rates of return, measures of risk, and the correlations among the various art and antique series.16Exhibit 3.14 shows these data and compares them with returns for one-year Treasury bonds, the Lehman Brothers Government/Corporate Bond Index, the Standard & Poor’s 500 Stock Index, and the annual inflation rate.
Because the results vary so much, it is impossible to generalize about the performance of art and antiques. As shown, the average annual compound rates of return (measured by the geomet- ric means) ranged from a high of 16.8 percent (modern paintings) to a low of 9.99 percent (English silver). Similarly, the standard deviations varied from 21.67 percent (Impressionist- Postimpressionist paintings) to 8.74 percent (American furniture). The relative risk measures (the coefficients of variation) varied from a high of 1.33 (Continental silver) to a low value of 0.71 (English furniture). The annual rankings likewise changed over time.
Although there was a wide range of mean returns and risk, the risk-return plot in the exhibit indicates a fairly consistent relationship between risk and return during this 16-year period.
Comparing the art and antique results to the bond and stock indexes indicates that the stocks and bonds experienced results in the middle of the art and antique series.
Analysis of the correlations among these assets using annual rates of return reveals several important relationships. First, the correlations among alternative antique and art categories vary substantially from above 0.90 to negative correlations. Second, the correlations between rates of return on art/antiques and bonds are generally negative. Third, the correlations of art/antiques with stocks are typically small positive values. Finally, the correlation of art and antiques with the rate of inflation indicates that several of the categories were fairly good inflation hedges since they were positively correlated with inflation and they were clearly superior inflation hedges compared to long bonds and common stocks.17This would suggest that a properly diversified portfolio of art, antiques, stocks, and bonds should provide a fairly low-risk portfolio. The reader should recall our earlier observation that most art and antiques are quite illiquid and the trans- action costs are fairly high compared to financial assets.
Art and Antiques
16Frank K. Reilly, “Risk and Return on Art and Antiques: The Sotheby’s Indexes,” Eastern Finance Association Meeting, May 1987. The results reported are a summary of the study results and have been updated through September 1991.
17These results for stocks are consistent with several prior studies that likewise found a negative relationship between inflation and returns on stocks, which indicates that common stocks have been poor inflation hedges. See Eugene F.
Fama, “Stock Returns, Real Activity, Inflation and Money,” American Economic Review 71, no. 2 (June 1991): 545–565;
and Jeffrey Jaffe and Gershon Mandelker, “The ‘Fisher Effect’ for Risky Assets: An Empirical Investigation,” Journal of Finance 31, no. 2 (June 1976): 447–458.
HISTORICALRISK-RETURNS ONALTERNATIVEINVESTMENTS 95 CORRELATIONS AMONG GLOBAL CAPITAL MARKET ASSETS: 1980–1999 (MONTHLY)
WILSHIRE IFC EMERGING MSCI M-S WORLD BRINSON
INDEX S&P 500 5000 MARKETSTOCK EAFE STOCK GSMI
S&P 500 1.000 0.989 0.347 0.497 0.555 0.911
Ibbotson Small Cap 0.775 0.844 0.352 0.413 0.459 0.763
Wilshire 5000 0.989 1.000 0.361 0.499 0.560 0.919
Russell 1000 0.997 0.996 0.350 0.494 0.553 0.916
Russell 1000 Value 0.960 0.954 0.366 0.480 0.538 0.881
Russell 1000 Growth 0.972 0.975 0.315 0.476 0.533 0.894
Russell 2000 0.838 0.901 0.356 0.443 0.496 0.822
Russell 2000 Value 0.814 0.866 0.352 0.430 0.480 0.797
Russell 2000 Growth 0.824 0.891 0.344 0.433 0.488 0.808
Russell 3000 0.993 0.999 0.354 0.495 0.555 0.918
Russell 3000 Value 0.958 0.958 0.370 0.482 0.541 0.885
Russell 3000 Growth 0.969 0.979 0.322 0.479 0.536 0.897
IFC Emerg. Mkt. 0.347 0.361 1.000 0.348 0.354 0.359
MSCI EAFE 0.497 0.499 0.348 1.000 0.986 0.719
Toronto Stock Exch. 300 0.769 0.800 0.383 0.529 0.591 0.784
Financial Times All Shares 0.641 0.654 0.419 0.549 0.563 0.662
Frankfurt (FAZ) Index 0.518 0.513 0.399 0.461 0.475 0.521
Nikkei Index 0.389 0.387 0.356 0.727 0.716 0.507
Tokyo Stk. Exch. Index 0.306 0.305 0.313 0.692 0.677 0.428
M-S World Index 0.555 0.560 0.354 0.986 1.000 0.760
Brinson GSMI 0.911 0.919 0.359 0.719 0.760 1.000
LB Government Bond 0.278 0.250 –0.127 0.184 0.187 0.393
LB Corporate Bond 0.338 0.320 –0.064 0.205 0.216 0.448
LB Aggregate Bond 0.301 0.278 –0.091 0.196 0.201 0.419
LB High-Yield Bond 0.462 0.482 0.142 0.337 0.352 0.547
ML World Gov’t Bonda 0.055 0.027 –0.229 0.433 0.430 0.281
ML World Gov’t Bond except U.S. 0.005 –0.006 –0.127 0.507 0.502 0.259
Wilshire Real Estate 0.640 0.688 0.281 0.388 0.432 0.672
Goldman Commodities Index 0.044 0.052 0.026 0.084 0.103 0.048
Goldman Energy Commodities Sub-Indexb –0.059 –0.065 –0.006 –0.011 0.003 –0.074
Goldman Non-Energy Commodities Sub-Index 0.193 0.210 0.099 0.238 0.248 0.216
Goldman Ind. Metals Commodities Sub-Index 0.123 0.145 –0.063 0.142 0.155 0.169
Goldman Metals Commodities Sub-Index 0.110 0.134 0.037 0.203 0.242 0.179
Goldman Agriculture Commodities Sub-Index 0.130 0.154 0.067 0.129 0.142 0.132
Goldman Livestock Commodities Sub-Index 0.123 0.122 0.057 0.160 0.160 0.145
Treasury-Bill (1 year) 0.116 0.101 –0.080 0.114 0.106 0.244
Inflation –0.159 –0.164 –0.005 –0.192 –0.199 –0.212
EXHIBIT 3.13
aStatistics for the ML World Government Bond indexes were based upon 1986–1999 data only.
bStatistics for the Goldman Energy Commodities Sub-Index were based upon 1983–1999 data only.
Source: Frank K. Reilly and David J. Wright, “An Analysis of Global Capital Market Risk-Adjusted Returns,” Mimeo (July 2001).
Somewhat similar to art and antiques, returns on real estate are difficult to derive because of the limited number of transactions and the lack of a national source of data for the transactions that allows one to accurately compute rates of return. In the study by Goetzmann and Ibbotson, the authors gathered data on commercial real estate through REITs and Commingled Real Estate Funds (CREFs) and estimated returns on residential real estate from a series created by Case and Shiller.18The summary of the real estate returns compared to various stock, bond, and an infla- tion series is contained in Exhibit 3.15. As shown, the two commercial real estate series reflected strikingly different results. The CREFs had lower returns and low volatility, while the REIT index had higher returns and risk. Notably, the REIT returns were higher than those of common stocks, but the risk measure for real estate was lower (there was a small difference in the time period). The residential real estate series reflected lower returns and low risk. The longer-term results indicate that all the real estate series experienced lower returns than common stock, but they also had much lower risk.
The correlations in Exhibit 3.16 among annual returns for the various asset groups indicate a relatively low positive correlation between commercial real estate and stocks. In contrast, there was negative correlation between stocks and residential and farm real estate. This negative rela- Real Estate
Geometric Mean 20
15
10
5
0
0 2 4 6 8 10 14 16 18 20 22 24
Standard Deviation 1-Year Bond
CPI
Amer Furn
LBGC Fr + Cont Furn UW Index
Eng Furn Amer Paint FW Index VW Index
Cont Ceramic
12
Eng Silver Cont Silver
19C Euro Old Master S&P 500 Chinese Ceramic
Mod Paint Cont Art Imp Paint
EXHIBIT 3.14 GEOMETRIC MEAN RATES OF RETURN AND STANDARD DEVIATION FOR SOTHEBY’S INDEXES, S&P 500, BOND MARKET SERIES, ONE-YEAR BONDS, AND INFLATION:
1976–1991
Source: Adapted from Frank K. Reilly, “Risk and Return on Art and Antiques: The Sotheby’s Indexes,” Eastern Finance Association Meeting, May 1987. (Updated through September 1991.)
18William N. Goetzmann and Roger G. Ibbotson, “The Performance of Real Estate as an Asset Class,” Journal of Applied Corporate Finance 3, no 1 (Spring 1990): 65–76; Carl Case and Robert Shiller, “Price of Single Family Homes Since 1970; New Indexes for Four Cities,” National Bureau of Economic Research, Inc., Working Paper No. 2393 (1987).
HISTORICALRISK-RETURNS ONALTERNATIVEINVESTMENTS 97 SUMMARY STATISTICS OF COMMERCIAL AND RESIDENTIAL REAL ESTATE SERIES COMPARED TO STOCKS, BONDS, T-BILLS, AND INFLATION
SERIES DATE GEOMETRICMEAN ARITHM. MEAN STANDARDDEVIATION
Annual Returns 1969–1987
CREF (Comm.) 1969–87 10.8% 10.9% 2.6%
REIT (Comm.) 1972–87 14.2 15.7 15.4
C&S (Res.) 1970–86 8.5 8.6 3.0
S&P (Stocks) 1969–87 9.2 10.5 18.2
LTG (Bonds) 1969–87 7.7 8.4 13.2
TBILL (Bills) 1969–87 7.6 7.6 1.4
CPI (Infl.) 1969–87 6.4 6.4 1.8
Annual Returns over the Long Term
I&S (Comm.) 1960–87 8.9% 9.1% 5.0%
CPIHOME (Res.) 1947–86 8.1 8.2 5.2
USDA (Farm) 1947–87 9.6 9.9 8.2
S&P (Stocks) 1947–87 11.4 12.6 16.3
LTG (Bonds) 1947–87 4.2 4.6 9.8
TBILL (Bills) 1947–87 4.9 4.7 3.3
CPI (Infl.) 1947–87 4.5 4.6 3.9
EXHIBIT 3.15
Source: William N. Goetzmann and Roger G. Ibbotson, “The Performance of Real Estate as an Asset Class,” Journal of Applied Corporate Finance 3, no. 1 (Spring 1990): 65–76. Reprinted with permission.
CORRELATIONS OF ANNUAL REAL ESTATE RETURNS WITH THE RETURNS ON OTHER ASSET CLASSES
I&S 1
CREF 0.79 1
CPI Home 0.52 0.12 1
C&S 0.26 0.16 0.82 1
Farm 0.06 –0.06 0.51 0.49 1
S&P 0.16 0.25 –0.13 –0.20 –0.10 1
20-Yr. Gvt. –0.04 0.01 –0.22 –0.54 –0.44 0.11 1
1-Yr. Gvt. 0.53 0.42 0.13 –0.56 –0.32 –0.07 0.48 1
Infl. 0.70 0.35 0.77 0.56 0.49 –0.02 –0.17 0.26 1
I&S CREF CPI C&S Farm S&P 20-Yr. 1-Yr. Infl.
Home Gvt. Gvt.
EXHIBIT 3.16
Note: Correlation coefficient for each pair of asset classes uses the maximum number of observations, that is, the minimum length of the two series in the pair.
Source: William N. Goetzmann and Roger G. Ibbotson, “The Performance of Real Estate as an Asset Class,” Journal of Applied Corporate Finance 3, no. 1 (Spring 1990): 65–76. Reprinted with permission.
tionship with real estate was also true for 20-year government bonds. Several studies that con- sidered international commercial real estate and REITs indicated the returns were correlated with stock prices but also provided significant diversification.19
These results imply that returns on real estate are equal to or slightly lower than returns on common stocks, but real estate possesses favorable risk results. Specifically, real estate had much lower standard deviations as unique assets and either low positive or negative correlations with other asset classes in a portfolio context.
19P. A. Eichholtz, “Does International Diversification Work Better for Real Estate than for Stocks and Bonds?” Finan- cial Analysts Journal 52, no. 1 (January–February 1996): 56–62; S. R. Mull and L. A. Socnen, “U.S. REITs as an Asset Class in International Investment Portfolios,” Financial Analysts Journal 53, no. 2 (March–April 1997): 55–61; and D. C. Quan and S. Titman, “Commercial Real Estate Prices and Stock Market Returns: An International Analysis,”
Financial Analysts Journal 53, no. 3 (May–June 1997): 21–34.
The Internet Investments Online
As this chapter describes, the variety of financial products is huge and potentially confusing to the novice (not to mention the experienced profes- sional). Two good rules of investing are (1) stick to your risk tolerance; unfortunately, some people will try to sell instruments that may not be appro- priate for the typical individual investor, even when taken in the context of their overall portfo- lio, and (2) don’t invest in something if you don’t understand it. Web sites mentioned in Chapters 1 and 2 provide useful information on a variety of investments. Below we list a few others that may be of interest.
http://www.site-by-site.com This site fea- tures global financial news including market infor- mation and economic reports for a variety of countries with developed, developing, and emerg- ing markets. Some company research is available on this site as is information on derivatives mar- kets worldwide.
http://www.global-investor.com This site contains information on ADRs, global financial information, and allows users to follow the perfor- mance of the world’s major markets. It provides a
number of links to global, regional, and country markets.
http://www.nfsn.com The home page of the National Financial Services Network offers information on personal and commercial financial products and services, in addition to news, inter- est rate updates, and stock price quotes.
http://www.emgmkts.com The Emerging Markets Companion home page contains informa- tion on emerging markets in Asia, Latin America, Africa, and Eastern Europe. Available information and links includes news, prices, market informa- tion, and research.
http://www.law.duke.edu/globalmark Duke University’s Global Capital Markets Center includes information and studies on a variety of financial market topics, most written from a legal perspective.
http://sothebys.ebay.com Home page of Sotheby’s Inc., the auction house. This site con- tains auction updates and information on col- lectibles, Internet resources, and featured upcom- ing sales.
• Investors who want the broadest range of choices in investments must consider foreign stocks and bonds in addition to domestic financial assets. Many foreign securities offer investors higher risk- adjusted returns than do domestic securities. In addition, the low positive or negative correlations between foreign and U.S. securities make them ideal for building a diversified portfolio.
• Exhibit 3.17 summarizes the risk and return characteristics of the investment alternatives described in this chapter. Some of the differences are due to unique factors that we discussed. Foreign bonds are
Summary