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1.

What characteristics of foreign securities lead to diversification benefits for


American investors?
Answer:
a) A lot of foreign securities are issued by corporations that produce services and
goods not available from the United States companies.
b) All U.S. businesses are more or less subjected to the same cyclical economic
variations. Foreign securities, by contrast, entail claims on economies whose cycles
are not absolutely in phase with the United States economic cycle. Therefore, just
as movements in various stocks slightly offset each other in an all-U.S. portfolio, as
well, movements in non-U.S. and U.S. stocks cancel out each other somehow

2. Will the increasing integration of national capital markets reduce the benefits of
international diversifications?
Answer.
Notwithstanding the increasing integration of the national capital markets, they still
do not march in lock step. A few economies and, therefore, their markets will
perform better than others at any given moment, so having stakes in numerous
nations still spreads risks. Nevertheless, increasing integration can bring about
more movement in common risk aspects (i.e., real interest rate changes). Thus, this
will improve the correlation of national markets and reduce the risk-reducing
benefits of diversifying globally. Finally, it is a practical issue and one that needs to
be addressed, as to whether the advantages of international investing are reducing.
My point is that international investing can still minimize portfolio risk, but still the
degree of risk reduction is minimal today than in the past.

3. Studies show that the correlations between domestic stocks are greater than the
correlations between domestic and foreign stocks.

Answer.
Domestic stocks are usually more highly correlated since they are all subjects in
one way or another to the conditions of the local economy. The lower correlations
between foreign and domestic stocks indicate the lower correlations between the
foreign and domestic economies. This implies that investing in the international
market may lead to greater diversification.

4. Explain why this is likely to be the case. What implications does this fact have for
international investing?
Answer
These lower correlations between the domestic and foreign economies imply that
worldwide investing is preferred because it most likely to leads to huge
diversification than only investing across companies within a nation. As the above
explanation indicates, these lower correlations seem to be persisting regardless of
the greater integration of the international economy.

5. Who is likely to gain more from investing overseas, a resident of the United
States or of Mexico? Explain.
Answer

Mexican investors will earn much more from the international investing. The extent
of the United States economy is such that the world stock markets and U.S. are
highly correlated while as for the Mexican stock market, it is much smaller, thus
showing a much lower correlation with the world stock market. This brings about a
greater diversification (and, therefore, risk reduction) profits for the Mexican
investors compared to the U.S. investors. Also, the United States has a wider range
of industries compared to Mexico, thus granting much more scope for industry
diversification out of Mexico than would be valid for a U.S. investor who may have
access to such a wide range of industries already.
6. Suppose that Mexican bonds are yielding more than 100 percent annually. Does
this high yield make them suitable for American investors looking to raise the return
on their portfolios? Explain.

ANSWER.
These revenues are denominated in nominal peso terms, exposing them to currency
risk. Anyway, holding a small portion of your portfolio in Mexican bonds will
minimize its risk, without sparing expected revenue. Since the arbitrage will
equilibrate the anticipated returns across the nations and at the same time, the
actual revenues from the Mexican peso bonds are comparatively uncorrelated with
returns on the United States stock market. Thus, the main reason for holding
Mexican bonds is to reduce risk, not raise expected return