LOS k: Discuss the risks faced by investors in emerging-market securities and the country risk analysis techniques used to evaluate emerging market economies.

Q1. Which of the following is NOT indicative of low risk in an emerging market economy?

A)   Foreign exchange reserves are twice that of the short-term debt.

B)   A foreign debt level that is 75% of GDP.

C)   A current account deficit that is 2% of GDP.

Correct answer is B)

Foreign debt levels greater than 50% of GDP indicate that the country may be overlevered. Debt levels greater than 200% of the current account receipts also indicate high risk. Current account deficits (roughly speaking, imports are greater than exports) greater than 4% of GDP can be problematic because the deficit must be financed through external borrowing. High risk is also indicated when foreign exchange reserves are less than the short-term debt that must be paid off in one year.

Q2. Which of the following is NOT an indication of high risk in an emerging market economy?

A)   A GDP growth rate of 3%.

B)   A high fiscal deficit.

C)   A government committed to structural reform.

Correct answer is C)

If a government is supportive of structural reforms necessary for growth, then the investment environment is more hospitable. Growth rates less than 4% may indicate that the economy is growing slower than the population, which can be problematic in these underdeveloped countries.

Q3. Which of the following statements regarding risk in emerging market economies is least accurate?

A)   Equity investors should focus on growth prospects and risk.

B)   The economies are often heavily dependent on consumer durables

C)   Their undiversified nature makes them susceptible to volatile capital flows and economic crises.

Correct answer is B)

Small economies are often heavily dependent on the sale of commodities and their undiversified nature makes them susceptible to volatile capital flows and economic crises.

LOS k: Discuss the risks faced by investors in emerging-market securities and the country risk analysis techniques used to evaluate emerging market economies. fficeffice" />

Q1. Which of the following is NOT indicative of low risk in an emerging market economy?

A)   Foreign exchange reserves are twice that of the short-term debt.

B)   A foreign debt level that is 75% of GDP.

C)   A current account deficit that is 2% of GDP.

Correct answer is B)

Foreign debt levels greater than 50% of GDP indicate that the country may be overlevered. Debt levels greater than 200% of the current account receipts also indicate high risk. Current account deficits (roughly speaking, imports are greater than exports) greater than 4% of GDP can be problematic because the deficit must be financed through external borrowing. High risk is also indicated when foreign exchange reserves are less than the short-term debt that must be paid off in one year.

Q2. Which of the following is NOT an indication of high risk in an emerging market economy?

A)   A GDP growth rate of 3%.

B)   A high fiscal deficit.

C)   A government committed to structural reform.

Correct answer is C)

If a government is supportive of structural reforms necessary for growth, then the investment environment is more hospitable. Growth rates less than 4% may indicate that the economy is growing slower than the population, which can be problematic in these underdeveloped countries.

Q3. Which of the following statements regarding risk in emerging market economies is least accurate?

A)   Equity investors should focus on growth prospects and risk.

B)   The economies are often heavily dependent on consumer durables

C)   Their undiversified nature makes them susceptible to volatile capital flows and economic crises.

Correct answer is B)

Small economies are often heavily dependent on the sale of commodities and their undiversified nature makes them susceptible to volatile capital flows and economic crises.