Download Chapter: 19

Chapter: 19
American depository receipts (ADRs)
correlation coefficient
currency fluctuations
diversification benefits
foreign currency effects
multinational corporations
World Index
These securities represent the ownership
interest in a foreign company's common
stock. The process is as follows: The shares
of the foreign company are purchased and
put in trust in a foreign branch of a New
York bank. The bank, in turn, receives and
can issue depository receipts to the
American shareholders of the foreign firm.
These ADRs (depository receipts) allow
foreign shares to be traded in the United
States much like any other security.
Through ADRs, one can purchase the stock
of Sony Corporation, Honda Motor Co.,
Ltd., and hundreds of other foreign
corporations.
The measurement of joint movement
between two variables.
Changes in the relative value of one
currency to another. For example, the
French franc may advance or decline in
relation to the dollar. To the extent a
foreign currency appreciates relative to the
dollar, returns on foreign investments will
increase in terms of dollars. The opposite
would be true for declining foreign
currencies.
Risk reduction through a diversification of
investments. Investments that are
negatively correlated or that have low
positive correlation provide the best
diversification benefits. Such benefits may
be particularly evident in an internationally
diversified portfolio.
To the extent a foreign currency
appreciates relative to the dollar, returns on
foreign investments will increase in terms
of dollars. The opposite would be true for
declining foreign currencies.
Firms that have operations in a number of
countries. Multinationals are frequently
found in such industries as oil, mainframe
computers, and banking.
A value-weighted index of market
performance in 19 major countries as
compiled by Capital International, S.A., of
Geneva, Switzerland.