Direct Investing

Yes. Chances are the international investment in Asia Electronics will prove to have a negative correlation. Investments in different markets due to geographical location or industry are often negatively correlated.

Imagine PinkCo has decided to invest internationally. One way they could accomplish this is by directly investing in a foreign market. Direct investment is the term used when an investor or business owns at least 10% of a foreign company's capital. If an investor owns less than 10%, it is just an addition to a stock portfolio. PinkCo has its eyes set in the Asia-Pacific region and targets a direct investment of Asia Electronics, a Japanese firm. Asia Electronics has issued 100,000 shares of stock. PinkCo is not looking for any new manufacturing resources in that region. When PinkCo purchases 18% of the equity worth of shares directly from Asia Electronics, besides having management influence, what is PinkCo's most likely benefit?

No. PinkCo does lose its management influence in Asia Electronics, but PinkCo no longer has equity in the company and does not need to protect its foreign direct investment there.

No. While the political climate may have been stable when the foreign direct investment was made, PinkCo is lucky that the political risk in Japan remained low while they had a stake in Asia Electronics. This may not have been the case if the target company was in for example, the Middle Eastern region of the world.

Yes. At the time of sale PinkCo has to convert the foreign currency (Yen) back into US dollars at the prevailing exchange rate. The uncertain future exchange rate is a concern when companies decide to directly invest in a foreign market. The total return on investment is affected by this exchange rate risk.

To summarize: [[summary]]

When assets are negatively correlated, the risk on PinkCo's portfolio is reduced. PinkCo now purchases 18,000 shares of Asia Electronics' stock at 99.99 Yen per share, which helps Asia Electronics expand its facilities. When PinkCo makes this purchase, it exchanges its domestic currency (assume US dollars) into the Yen (the foreign currency) at the current exchange rate. PinkCo is able to bring some of its technological advances to their foreign investment firm. The following year, suppose PinkCo urgently needs capital and decides to sell 10,000 shares in the marketplace. The current market price is 111.11 Yen per share. Considering the capital gain PinkCo realizes on the sale, what is perhaps the largest concern associated with this sale?

No, chances are the international investment in Asia Electronics will not be a positive correlation. When two or more investments move proportionately with each other they have positive correlation.

Asia Electronics has a direct correlation with PinkCo's current portfolio

Asia Electronics reduces risk within PinkCo's current portfolio

PinkCo loses its influence in Asia Electronics and experiences management risk

PinkCo is exposed to political risk

PinkCo experiences exchange rate risk

Continue

Continue

Continue