Securities being issued by parent companies or large corporate stockholders are convertible into common stock of the companies being sold or spun-off. There is substantial demand for converts in Europe as an equities culture evolves. Reducing Risk in Increasingly Volatile Global Markets Markets no longer act in isolation. A Russian debt default or Taiwanese earthquake will send financial tremors around the world. Increased volatility, or the extent to which prices fluctuate over time, is now a fact of life.
Convertible securities reduce portfolio risk.
Convertibles have been even less risky than corporate bonds as measured by the standard deviation of their returns. Moreover, convertibles demonstrate a low degree of correlation with both equities and bonds. This low degree of correlation, especially with bonds, explains why convertibles can be used to reduce volatility in a portfolio. Studies indicate that the optimal amount of convertibles in a portfolio is about 5 percent of total assets. There are four main benefits to investing in convertibles.