Institutional investors have expanded their scope of investments in two important ways during the past 15 years. They have become more active in the direct purchase of real estate and they have become more global in their approach to investing. However, except for a few notable exceptions, U.S. institutions tend to stay close to home when it comes to real estate investments.
The increased presence of real estate and foreign stocks in the portfolios of institutions may have been motivated in part by academic studies that suggest that covariances between U.S. stocks and both foreign stocks and U.S. commercial real estate are quite low, indicating that the latter asset classes provide diversification to portfolios invested primarily in U.S. stocks. The reluctance to purchase foreign real estate directly is probably due to the increased expenses and the information problems associated with purchasing real property outside of the U.S.. In addition, there has been no research that we are aware of that examines the risk/return trade-offs involved in such investments.
Open economy macroeconomic models typically represent international financial linkages in terms of net foreign assets and the current account. Recent data show, however, that there are large cross-country gross asset and liability positions. Lane and Milesi-Ferretti (2001,2006) show that these gross portfolio holdings have grown rapidly, particularly in the last decade. The existence of large gross positions offers a number of interesting challenges for open economy macro theory. For instance, can international macroeconomic models offer any explanation for the observed structure of portfolio holdings?
Balance sheet of a company has two different sides: first, right side of balance sheet called as liabilities shows where money comes from; second, left side of balance sheet called as assets shows where money goes. Financial structure explains how firms’ operations that are acquiring assets, but whose yields are uncertain are financed. There are three sources of funding available to firms: those are retainedearnings, debt and equity. In academic, financial and business environments, the problems about how firms should finance their operations to avoid financial crises remain alive and acute.
