Investment Enhancement

Running head: INVESTMENT ENHANCEMENT

Investment Enhancement

Investment Enhancement

Creating a diversified portfolio that optimally uses funds to fulfill specific financial goals can be daunting because of the numerous investments available. Several methods for further enhancing, and thus protecting, a portfolio exists. This paper will summarize the effects of international diversification, alternate vehicles, and derivatives on an already diversified portfolio.

International Diversification

Increased access to foreign markets coupled with globalization in industry has led to enhanced risk reduction resulting from investing in international markets. Foreign investments can aid investors in avoiding systematic risk inherent in domestic market investments that occur because of economic changes in a particular country. Burhan Yavas, PhD (2009), elaborates on the benefits of foreign investing stating, “since differences exist in levels of economic growth and timing of business cycles among various countries, international portfolio diversification can be used as a means of reducing risk” (para. 6). Specific events that have affected the entire domestic market may not have altered foreign investments further illustrating how foreign investments can provide additional safeguards for a portfolio. Negative correlations between market changes and potential investments can help investors choose vehicles that will provide additional protection effectively through the reduction of systematic risk. Investments whose movements do not correspond to other markets will provide the highest degree of shelter from risk associated with global market changes.

International investing has the potential to offer large returns and simultaneously reducing risk, especially in developing countries that have entered stock exchanges recently and are growing quickly because of emerging markets. However, foreign investing comes with some additional risk so expected return should be...