Equity Investments 【 Reading 30】习题精选 equity, country, government, 2012

prashantsahni

country announces a liberalization program and the government is more credible then equity prices should:

A) increase more resulting in lower expected returns.

B) decrease more resulting in lower expected returns.

C) increase more resulting in higher expected returns.

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If an emerging country announces a liberalization program and the government is more credible then stock prices should increase more. As prices rise in the newly liberalized market, the expected return for the market should decline.

prashantsahni

Which of the following best describes the pricing of emerging market equities? If the emerging market transitions from segmented to integrated, the country’s equities will be priced according to its:

A) variance risk and its expected returns will be lower.

B) covariance risk and its expected returns will be higher.

C) covariance risk and its expected returns will be lower.

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When an emerging market transitions from segmented to integrated, prices will depend on covariance risk instead of the variance. This is because investors will now be able to include the country’s equities in a portfolio. In a well-diversified portfolio, covariance risk is the only risk important. Equity prices will be higher because the covariance with world markets will be lower than the variance. As prices rise, the expected return for the market should decline as well.

prashantsahni

Which of the following best describes the pricing of emerging market equities? If an emerging country announces a liberalization program, equity prices will:

A) rise and the cost of capital will increase.

B) fall and the cost of capital will decline.

C) rise and the cost of capital will decline.

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When an emerging country announces a liberalization program, equity prices will increase. The rise in equity prices will result in lower expected returns and a lower cost of capital for emerging firms.

prashantsahni

Which of the following best characterizes the behavior and implications of changes in the dividend yield after liberalization? Dividend yields:

A) decrease and this suggests that the cost of capital permanently declines.

B) increase and this suggests that the cost of capital temporarily increases.

C) increase and this suggests that the cost of capital permanently declines.

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Liberalization results in initially increased capital flows into a developing country. The presence of reduced dividend yields in developing countries after liberalization suggests that the reduction in the cost of capital is permanent.

prashantsahni

Which of the following best characterizes the relationship between market liberalization and stock return volatility? After liberalization, there is evidence that return volatility:

A) increases and in the long run stock volatility should increase.

B) does not change but in the long run stock volatility should decline.

C) increases but in the long run stock volatility should decline.

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Liberalization may positively impact return variability if greater information flow results in greater return reactivity or if speculative capital flows increase. On the other hand, there should not be as much deviation from fundamental value, so return variability may decline. The empirical evidence, however, demonstrates that liberalization does not affect the volatility of returns. Over the long run, return variability should decline as the economy matures.

prashantsahni

Which of the following best characterizes the relationship between market liberalization and market integration?

A) Market integration precedes market liberalization.

B) Market liberalization precedes market integration.

C) The existence of one does not guarantee the existence of the other.

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Market liberalization does not guarantee the existence of market integration and vice versa. A market can be somewhat integrated (e.g., its stocks are available via closed end mutual funds) without the government pursuing liberalization. A government can pursue liberalization but its stocks might not be freely traded due to impediments in trading.

prashantsahni

Which of the following are most closely and directly associated with lower costs of capital in emerging countries?

A) Market segmentation and government infrastructure.

B) Financial market liberalization and privatizations.

C) Financial market liberalization and government infrastructure.

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When an emerging country announces a liberalization program, equity prices will increase. The rise in equity prices will result in lower expected returns and a lower cost of capital for emerging firms.
When firms that were formerly government owned are privatized, the government signals its intent to reduce its interference in the economy and investors become more willing to invest in risky assets. Privatizations also increase investment opportunities which allows for better performing portfolios, which also increases investors’ willingness to hold risky assets. Hence the expected returns and cost of capital fall in the economy.

prashantsahni

Which of the following best characterizes the effect of liberalization on market microstructure in emerging markets? Liquidity:

A) increases and bid-ask spreads decrease.

B) increases and bid-ask spreads increase.

C) decreases and bid-ask spreads increase.

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The effect of liberalization is to increase liquidity and volume. However, bid-ask spreads increase possibly because new, less experienced foreign investors are exploited by the local dealers.

prashantsahni

Which of the following best characterizes the relationship between privatizations, returns, and the cost of capital in emerging countries? Privatizations result in:

A) higher expected returns and lower costs of capital.

B) lower expected returns and higher costs of capital.

C) lower expected returns and lower costs of capital.

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When firms that were formerly government owned are privatized, the government signals its intent to reduce its interference in the economy and investors become more willing to invest in risky assets. Privatizations also increase investment opportunities which allows for better performing portfolios, which also increases investors’ willingness to hold risky assets. Hence the expected returns and cost of capital fall for firms in the economy.

prashantsahni

Which of the following best characterizes return patterns in emerging markets? The returns are:

A) not normally distributed and are not subject to structural breaks.

B) normally distributed and are subject to structural breaks.

C) not normally distributed and are subject to structural breaks.

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Emerging market returns are not normally distributed. Emerging market return data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.