Investment advisors recommend risk reduction through international diversification. International investing allows you to takeadvantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment ineither Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, whichhas a 20% chance for being good, a 50% chance for being fair, and a 30% chance for being poor. Probability distributions of thereturns for these markets are given in the accompanying table.State ofthe U.S.Returns in Returns inEconomyGoodFairPoorEurope10%6%-6%Asia18%10%-12%a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4decimal places. Round your final answers to 2 decimal places.)Expected valueStandard deviationEuropeAsia3.20 %5.00%%%b. What will Janice pick as an investment if she is risk neutral?Investment in EuropeO Investment in Asia

a). EuropeAsiaExpected value3.20 %5.00 %Standard Deviation6.21 %11.53 %b). Investment in…

Answered: Investment advisors recommend risk…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Explain why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?
You are considering a sector-neutral value factor strategy where you buy the cheapest stocks (lowest P/Z) and short-sell the most expensive stocks (highest P/Z) within an industry. Stocks are value weighted on both the long and the short side. In this case, O A. You are overweighting certain industries and underweighting other industries (relative to the market portfolio) depending on the average P/Z ratio of that industry. O B. The weight invested in each industry is (roughly) proportional to the weight of that industry in the market portfolio. O. You are overweighting certain industries and underweighting other industries (relative to the market portfolio) depending on the %earnings growth rate of that industry. O D. Each industry receives equal weight O E. You are overweighting small stocks relative to large stocks the market portfolio.
Explain measures and techniques used to manage international portfolio investments. Then, contrast determinants of MNC direct foreign investments in advanced countries versus emerging nations.
The role of risk managers is to: A. Make prophetic forecasts C. Produce a point estimate of the U.S. Dollar/Euro exchange rate D. Take a defensive posture B. Uncover sources of risk and make them visible
You are a portfolio manager for a large investment firm that is considering an investment in a startup technology company. The company has developed a new software application that is expected to revolutionize the industry. However, the company is not yet profitable and has a high degree of risk. Which of the following measures of risk would be most appropriate to evaluate this investment? Sharpe ratio Standard deviation Expected return Beta
Consider two investment opportunities A and B. Investment A: Expected return = 0.08, Standard deviation = 0.06 Investment B: Expected return = 0.24, Standard deviation = 0.08 Which investment would you choose A or B? Provide the rationale behind your decision. b. If company is selecting projects with the negative NPV, what impact this decision would have on the share price of the company c. While forecasting future sales, internal sales forecast is more appropriate or external sales forecast? d. Why are dividends the basis for the valuation of common stock? e. When the constant growth dividend valuation model is used to explain a stock's current price, the quantity (ke - g) represents the expected dividend yield. Is this statement right or wrong? Explain.
Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $1,001,000, and the exchange rate will be $1.4/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $501,120, and the exchange rate will be $1.6/£. You assess that the American economy will experience a boom with a 60 percent probability and a recession with a 40 percent probability. a. Estimate your exposure to the exchange risk. (Round final answer to nearest dollar.) Exposure b. Compute the variance of the pound value of your American equity position that is attributable to the exchange rate uncertainty. (Round final answer to nearest dollar.) Variance
An analyst is studying the movement of the stock Philippines. His research and came up with a different rates of return for Philippines, 25% for strong and 10% for weak economic scenarios. Based on the latest economic outlook, the probability of having a strong, normal, and weak economy, are 30%, 50%, and 20%, respectively. The total expected return of Philippines stock is 17% considering the various probabilities. Determine the rate of return of Philippines if the economy turns normal.
Made sure you differentiate portfolio investments from FDI. Can we argue that a "A closed economy, however, is entirely self-sufficient", or if it is, at what costs? An open economy is one that engages in international trade of goods, services, and financial assets. An open economy participates in a variety of trade activities with foreign nations. A country's market can be expanded in a way that a closed economy can never do. It buys shares, debentures, bonds, and other types of securities from foreign nations and sells them to countries abroad. Normal people of an open economy are free to travel and work wherever they wish in that economy's domestic boundaries. A closed economy, however, is entirely self-sufficient, which implies that neither imports nor exports ever leave the nation. The objective of a closed economy is to provide all domestic consumers' needs from inside its boundaries. It does not import goods or services from other nations or export goods or services to them.…
Explain why it might still be more efficient on a risk/reward basis to invest internationally rather than only domestically in the long run.
You are a market analyst for JP Morgan. Typically, your job is to analyze current trends in various economic markets and inform the bond traders what their future course of action should be. When conducting some research, you discover that in the real estate sector planned aggregate expenditure has consistently been in excess of aggregate output for the last year. In addition, you discover this has also been the case in the oil refining industry. please select an industry to most heavily promote to the bond traders and justify your decision. Support your position with two points. These positions can be either theoretical and/or empirical in nature. An exceptionally good answer would incorporate the recent events that have occurred in the global oil market.
The International Monetary Fund, the IMF, has forecasted that the global economy is likely to experience a contraction of 3% in 2020, due to the ravages of the COVID-19 pandemic on both developing and advanced economies. Investors believe that The Deutsche Bundesbank, the central bank of the Federal Republic of Germany, will employ direct foreign intervention strategies in the future, to minimize the economic fallout and increase the volume of exports. Assume the following information: 1 - year U.S. interest rate = 3% 1- year German interest rate = 6% Spot rate of euro = $1.09 Draw a diagram to illustrate your understanding of the relationship between interest rate parity and covered interest rate arbitrage and the interplay of market forces that will occur to eliminate arbitrage opportunities.

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