A few of the factors students may mention are client

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A few of the factors students may mention are - Client: "The U.S. markets have done extremely well in the past few years, so I should stay 100% invested in them." Your Reply: You can explain that there are other times when foreign markets have beat the U.S. substantially in performance. You can't tell easily beforehand what markets will do the best. It is important to consider that there are many times when countries' markets move in different directions and you can buffer your risk to some extent by investing globally. - Client: "You should keep your money at home." Your Reply: Don't confuse familiarity with good portfolio management. Even though there is a lot of information available on U.S. companies, it can be difficult to use the information to make good forecasts. Most professional managers aren't even good at this. - Client: "There's too much currency risk." Your Reply: It is true that there may be times when both a security's value in its own currency and the currency exchange rate may lead to poor returns. But the opposite is also true. And there are cases when security price movements and currency movements will have opposite impacts on your portfolio's return. This may have a smoothing effect on your portfolio. - Client: "Invest with the best." Your Reply: Even if U.S. markets have been the best performers in recent periods there is no guarantee that things will stay that way. If you diversify internationally you will benefit when other markets take the lead. Feedback: This question tests the student's knowledge of the importance of international deversification. Difficulty: Moderate 25-21
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Chapter 25 - International Diversification 52. You are managing a portfolio that consists of U.S. equities. You have prepared a presentation to use when you discuss the possibility of adding international stocks to your client's portfolio. - Draw a graph that shows the risk of the portfolio relative to the number of stocks held in the portfolio. - When your client arrives, he is surprised at your suggestion that he add international stocks, but is willing to listen to your statements to justify your recommendations. State two reasons why he should consider the international stocks and briefly explain each. The graph should look like the one that is shown in figure 25.7. - Two important reasons for adding international securities are the favorable diversification effects due to the less than perfect positive correlations among countries' returns and the possible benefit from currency risk. Feedback: This question tests the student's knowledge of the basic ideas behind investing in international stocks and other classes of equities. Difficulty: Moderate 25-22
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