The paper 'International Business Finance' is a perfect example of a Macro and Microeconomics Case Study. In the current investing climate, risk and rate of return are positively correlated. In that regard, you would expect that the rate of return for investing in the stock market has to be higher than in bonds because there is so much variation in what happens to stock prices. Investors would prefer to hold on to investment with positive returns during increasing market interest rates. On the other hand, investors would prefer investments with stable returns times of interest rate volatility as they are less volatile and susceptible to the interest rate risk The current economies are experiencing inflation and the investment to counter inflation would-be stocks that are high growth and with a decent dividend by nature.
There are also some government inflation-protected securities for Inflation-Protected Securities. The high growth stock is still the best option but the only drawback is that you might not always be able to determine correctly which one would perform well and there is no way to predict perfectly that a chosen stock will remain a high growth option in the future.
The Inflation-Protected Securities’ on the other are guaranteed for their real return which makes it attractive for those that don’ t want the headache of unpredictable inflation rates. Investment in stocks A share of stock is a legal claim to a share of the corporation’ s future profits, for example, if one has 100,000 shares of stock in a company which authorized shares of 1million, he owns the right to 10 percent of that company’ s future profits. It should be noted that if the stock is common stock, one will have the right to vote on major policy decisions affecting the company, such as the selection of the corporation’ s board of directors. During market boom stock returns go up and at that time anybody who invests in a broad range of stocks-through a mutual fund, for example, would have seen his or her wealth increase rather dramatically.
However, this should not be taken on its face value was seen in the case in 1933 when in a single year go the percentage rate of return that investors in the stock market obtained increased in value by 54 percent but later collapsed or the 1987 market crush where returns were wiped out in a single day. Although the 54 percent rise in the value of an investment in 1933 sounds great, it brings us to two serious long-run problems.
The first has to do with inflation; the other has to do with taxes. Correcting for inflation and taxes Inflation is important because it reduces the purchasing power of your savings. One needs to know how much you can purchase in real terms when making historical comparisons.
Inflation can be adjusted to long-run “ real” rate of return turns out which is an annualized corrected rate of 6.6 percent – not bad. But when one takes taxes into account, assuming that you are in the highest marginal tax bracket starting in 2014, you after-tax real inflation-adjusted annualized rate of return drops. So one can beat inflation by investing in the stock market in the long run, but taxes tend to beat investors down.
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