INSTRUCTORS MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9TH ED.

CHAPTER 15
SUGGESTED ANSWERS TO CHAPTER 15 QUESTIONS
1.

As seen in Exhibit 15.2, Hong Kong stocks are over twice as volatile as U.S. stocks. Does that mean that risk-averse American investors should avoid Hong Kong equities? Explain.

ANSWER. No. Although Hong Stock stocks are much more volatile /than U.S. stocks, their systematic component of risk is relatively low because of the low correlation with the U.S. market. The net result is that the systematic risk
(beta) of the average Hong Kong stock from a U.S. perspective is only 0.85, compared with a beta of 1.0 for the average U.S. stock. In other words, diversifying into Hong Kong stocks will reduce the riskiness of a portfolio currently concentrated in U.S. stocks.
2.

What characteristics of foreign securities lead to diversification benefits for American investors?

ANSWER. The two basic characteristics are:
a)

Many foreign securities are issued by companies that produce goods and services not available from U.S. companies. b) All U.S. companies are more or less subject to the same cyclical economic fluctuations. Foreign securities by contrast involve claims on economies whose cycles are not perfectly in phase with the U.S. economic cycle. Thus, just as movements in different stocks partially offset one another in an all-U.S. portfolio, so also movements in
U.S. and non-U.S. stocks cancel out each other somewhat.
3.

Will increasing integration of national capital markets reduce the benefits of international diversifications?

ANSWER. Despite increasing integration of national capital markets, they still don't march in lock step. Some economies and, hence, their markets will do better than others at any given time, so having stakes in several countries still spreads risks. Nonetheless, increasing integration