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Global Advisers Company (GAC) is a registered investment counseling firm solelyinvolved in


international securities portfolios. After much research on the

developing economy and capital markets of the country of South Korea, GAC has

decided to include an investment of South Korea stock market in its Emerging Market

Commingled Fund. However, GAC has not yet decided whether to invest actively or

by indexing. Your opinion on the active versus indexing decision has been solicited.

A summary of the research findings follows.

South Korea's economy is fairly well diversified across agricultural and natural

resources, manufacturing (both consumer and durable goods), and a growing finance

sector. Transaction costs in securities markets are relatively large in South Korea

because of high commissions and government "stamp taxes" on securites trades.

Accounting standards and disclosure regulations are quite detailed, resulting in wide

public availability of reliable information about companies' financial performance.

Capital flows into and out of South Korea and foreign ownership of South Korea

securities are strictly regulated by an agency of the national government. The

settlement procedures under these ownership rules often cause long delays in settling

trades made by nonresidents. Senior finance officials in the government are working

to deregulate capital flows and foreign ownership, but GAC's political consultant

believes that isolation sentiment may prevent much real progress in the short term run.

i) Briefly discuss four aspects of the South Korea's environment that favour investing

actively and four aspects that favour indexing.

(ii) Recommend whether GAC should invest in South Korea actively or by indexing

and justify your recommendation based on the factors identified in part i).

2) "Because corporations do not actually raise any funds in secondary markets, they

(secondary markets) are less important to the economy than primary markets." Discuss

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