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P. 566

540 PART 5 Finance

Global Business

Buying Stock in Multinational Companies
Is a Way to Diversify Your Investment Portfolio

Diversification is an important risk Coca-Cola is a U.S.-based company with corporate
reduction strategy for investors. Investing in headquarters in Atlanta, Georgia. Coke has
companies in different industries is one example of operations in almost 200 countries. Thus, even if
diversification. For example, you could invest in profits from Coca-Cola’s U.S. operations declined,
manufacturing, retail, technology, and service profits from Coke’s non-U.S. operations might be
companies. Consequently, if manufacturing increasing. As a result, Coke’s stock price could go
companies had a poor year from an investment up, even while one geographic area of operation
standpoint but other industry groups had a good year, was not doing well.
your investment portfolio might still have an overall
positive return. Investing in companies located Questions
around the world is another type of diversification. 1. Suppose you have decided to invest in three
You could invest in companies that have their company stocks: Sony, McDonald’s, and BMW.
corporate headquarters in various countries, such as How much of $10,000 would you invest in each
Sony in Japan, McDonald’s in the United States, and company? Why?
BMW in Germany. Of course, investing in U.S.-based 2. If you added a fourth company, Coca-Cola, how
companies that have global operations would still much would you invest in each of the four
provide some level of international diversification. companies? Why?

Since you may lack the time or expertise to manage an investment portfolio, you
may wish to consider managed investments. Managed investments include mutual
mutual fund A pool of commingled funds funds, unit investment trusts, and real estate investment trusts. A mutual fund is a
contributed by many investors and pool of commingled funds contributed by many investors and managed by a pro-
managed by a professional fund advisor fessional fund advisor in exchange for a fee. Mutual funds are available to meet a
in exchange for a fee
wide range of investment objectives, and there are about 11,000 mutual funds for
investors to choose from. To meet different investor needs, mutual funds specialize
in municipal bonds, money markets, growth stocks, small company stocks, gold
stocks, foreign stocks, business sectors, indexes, and other specializations.
unit investment trust (UIT) A type of A unit investment trust (UIT) is a type of closed-end mutual fund that allows
closed-end mutual fund that allows you to lock in relatively high yields. A UIT is established when an investment com-
investors to lock in relatively high pany acquires various bonds and then sells units of that portfolio to the general
yields
public. UITs may consist of tax-exempt or taxable bonds. The UIT offers a method
of locking in current interest rates (as with other fixed-income investments). How-
ever, the investment is subject to interest-rate risk and default risk like other fixed-
rate investments. Default risk is usually low because of the diversification in the
portfolio, but interest-rate risk is ever-present. Another problem with UITs is that
they are not very liquid. An advantage of UITs is that they offer diversification to a
small investor who may be unable to acquire enough individual bonds to be ade-
quately diversified.
real estate investment trust (REIT) A A real estate investment trust (REIT) invests in real estate rather than stocks
trust that invests in real estate rather and securities. Although real estate is not very liquid, a real estate investment trust
than stocks and securities
allows your real estate investment to be liquid. Almost like mutual funds, many
REITs are traded on one of the major stock exchanges. An REIT is generally required
by tax laws to distribute 90 percent of its taxable income as dividends or lose its tax-
advantage status.

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