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over floating rate bonds. While dollar-denominated bonds had the highest volume in 2000, euro-denominated bonds were the largest in volume in 2014. It is also important to note that financial institutions issue more international bonds than governments, international organizations, and corporations combined.
14-3c International Stock Markets Stock markets enable firms to issue new equity and raise long-term capital. However, it should be recognized that bonds are a much more important source of long-term financing for capital investments in land, buildings, equipment, and fixed assets. Unlike bonds that often are purchased by institutional investors, such as insurance companies that hold the debt securities to maturity, outstanding stocks are actively traded on a daily basis. Stock markets in developed countries and emerging-market countries allow investors around the world to invest in firms on a global basis. Many individuals have retirement savings in pension plans that can be invested in a myriad of mutual funds, which are funds managed by investment companies that pool savings and invest in stocks, bonds, real estate, commodities, and so forth. A mix of bond and stock investments is normally recommended. Stock investing is popular due to the fact that stocks have outpaced other types of financial instruments in terms of returns over periods of five years or more. For example, Chinese stock markets have provided about 70 percent returns on stock investments between 2003 and 2008. By comparison, U.S. long-term bond investments have earned about 4 percent per year for a total return of about 22 percent over this same time period. Of course, there is the possibility that stock prices can fall dramatically and result in large losses to investors. For example, the Dow Jones Industrial Average of the 30 largest U.S. firms decreased from about 13,000 in May 2008 to 7,500 in February 2009 for a loss of more than 40 percent in an eight-month period. Diversifying stock investments in different sectors of the economy and different countries can help to manage this risk. When stock prices in one sector or country rise, they may fall in another sector or country. Exhibit 14.6 shows the stock prices of two stocks (which will be called “stock 1” and “stock 2”) over time. Stock 1 has more volatile price movements than stock 2. If a person invests half of his or her money in stock 1 and half in stock 2, the combined portfolio (P) would have much lower volatility than either stock. This reduction in volatility proves that
E x h i b i t 1 4 . 6 D i v e r s i f i c at i o n C a n R e d u c e R i s k f o r I n v e s t o r s Diversification: Stock risk is reduced by combining stocks into a portfolio. Stock 1 Portfolio P Stock Price
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Stock 2
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