Investing in Financial Assets
There are two basic categories of investment assets: financial assets and real assets. For the purposes of this chapter, however, we will be discussing what most people think of when the term investment is mentioned: financial assets, such as stocks and bonds denominated and traded in U.S. dollars. To be properly diversified in financial assets, many financial planners recommend some exposure to foreign markets or assets denominated and traded in local (non-U.S. dollar) currencies in addition to maintaining holdings in more traditional investments. But unless investors invest in an American Depository Receipt (ADR) of foreign stock, they need to understand that there is a currency or exchange risk when converting the proceeds from a foreign stock into U.S. dollars. This is in addition to other systematic risks that are assumed when accumulating wealth via financial assets.