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International Finance ch15

International Finance ch15 - economy The lower the...

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Alexander Rocca International Finance  Ch15 (1) No, because the Hong Kong’s Systematic component of Risk is relative low because of  the low correlation with the U.S Market. The net result is that the systematic risk of  the average HK stock from the US perspective is only 0.85, compared with a beta of  1.0 for the average US stock. If we diversified into HK stocks we will reduce the risk  of the portfolio currently concentrated in US stocks.  (3) Increasing the integration could lead to more movement in common risk factors like real  interest rate changes. This will increase the correlation of national markets and  decrease the risk reducing benefits of diversifying internationally. The only thing left  to see is by how much the international investing reduces the risk. (4) Domestics stocks are more correlated because they are subject to the state of domestic 
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Unformatted text preview: economy. The lower the correlation between domestic and foreign stocks reflects the lower correlations between the domestic and foreign economies. The lower correlation implies that international investing is likely to lead to greater diversification than just investing across industries within a country. Lower correlation appears to be persisting despite the greater integration of the Global economy. (10) It depends on the currency of denomination and the currency of determination. The Price of the ADR is the price of the share stock in its foreign currency times the spot dollar value of the foreign currency. As the spot exchange rate changes, the dollar price of the ADR will also change. ADR are subject to exchange risk as the shares of foreign stocks....
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