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International portfolio diversification is a structure used by the international business community to reduce risk by investing in various form of assets. In instances where the properties does not rise or lower in price in a faultless synchrony, an assorted portfolio will result to reduced risk. The hazards and perils of the weighted average threat of the assets will be greatly reduced due to minimizing its constituents. A risk loath investor will diverse his investments to some extend to prevent his business failure. A more risk chary investor will diverse his or her investments more completely than a less risk loath investor.
Diversification is a general tactic and technique used to reduce by investors to minimize the degree of risk. Diversification as a method of reducing risk relies on the deficiency of a firm positive connection amongst the properties return and job even when the correlation is near zero or positive. In business it should be noted that diversification only works when the investment in each individual property or asset is minimized. The statement means that diversification does not necessarily mean that everybody must take more risk. The paper discusses the effects of international portfolio diversification on an investment portfolio, examines the alternative investment vehicles and how derivative securities further enhance a portfolio performance.
International portfolio diversification on an investment portfolio will enhance market integration. Market integration will enhance national and global markets and economies to be more linked and connected. This will be caused by increase in international trade and investment surge and favorable global financial transaction (Melvin, 1997). Market integration has risen due to; growth in information technology, growth of multinational organizations and institutions, ban of the foreign exchange controls, escalation of international capital flow and abolitions of financial structures of all the industrialized countries.
Due to international portfolio diversification on investment portfolio, market research will be enhanced. Market research will disclose the stock market all over the world. This will create integration as the markets are correlated and allied over some time period. Research conducted on firmness of market integration result to volatility in market correlations. This shows that the flow of equity markets will grow considerably after the conflict thus the benefits of international diversification are greatly reduced. Data and technology will grow due to international portfolio diversification on investment. Data and technology will show the performance and results of the investments. For example, an investor will be able to know the performance and results of the S&P 500 or DAX 30 and make decisions on where best to invest (Levi, 2009).
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International portfolio diversification on investment portfolio will result to findings and results. An ideal analysis of the data collected will indicate moves and growth of the markets. For example, it can be used to show the move of American, Germany and Japanese market in a given time frame. Market observers can use the findings and results to compare the market movements (Melvin, 1997). People can then calculate both the cross and the auto correlation in the market. Stability of interdependencies among the market will increase due to international portfolio diversification on investment portfolio. Studies conducted show that links, connections and correlation will be developed more when the major stock markets face global shocks. An investment vehicle can be defined as any method that is used to invest. The phrase is used widely to define a place one can put his or her money (Levi, 2009). Investment vehicle present a place where one can invest. For example, an investment vehicle may include; bonds, stocks, futures, options and mutual funds. It can also be used to form a spread between the liabilities and assets in investment. Examples of investment vehicles include; funds setup solution and aquamarine capital LLC.
The system of investment vehicles it to borrow money by giving short term securities which comprises of commercial paper, public bonds and medium term notes. The short term securities are given at a low interest rate and then loans the money by purchasing long term securities. The high term securities are bought at a high rate so that the investor can make more money and profits. The long term properties an investor may invest in may include, auto loans, student loans, bank, public and corporate bonds, credit cards and residential mortgage backed securities .Because of the system, the investment vehicles are considered to be a form of shadow banking system (Elton et al. 2009).
An investment vehicle is a security or a derivative. An investment vehicle may be a firm system or a structure in a property based security. The investment vehicle may include basic investment like bond or stocks. An investor uses an investment vehicle in order to make profits and provide capital in which one can use to invest. It may involve the buying of a debt which enables one to repay with interest, buying the share of a company and becoming the stakeholder of the company. Derivatives can be described as a financial tool that has worth based on the likelihood of the future prices of the assets.
Derivative securities enhance a portfolio performance by adding value of an asset by predicting the future price movement and flow of the property to which it is connected. Derivative securities will enable trading of assets in the market and cause alternative investment. The derivative securities form option capacity where the worth of the derivatives is connected to the condition, enhances exposure in areas where it is hard to trade assets, reduces the risk of the investors, speculates and creates profit if the property moves in the way predicted and create a leverage for movement of the value and cause a large difference in the value.
The paper has discussed the effects of international portfolio diversification on an investment portfolio, examined the alternative investment vehicles and how derivative securities further enhance a portfolio performance.