Reading 47: Emerging Markets Finance－LOS a market, impact, returns, expected, economic

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 17: Portfolio Management in a Global Context
Reading 47: Emerging Markets Finance
LOS a: Discuss financial and economic market integration and explain the theoretical impact on pricing and expected returns when a segmented market evolves into an integrated market.

tycoon

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

A) fall and the cost of capital will decline.

B) rise and the cost of capital will decline.

C) rise and the cost of capital will increase.

D) fall and the cost of capital will increase.

---

Answer and Explanation

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.

tycoon

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

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

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

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

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

---

Answer and Explanation

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 countrys 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.

tycoon

Which of the following best describes the pricing of emerging market equities? If an emerging country announces a liberalization program and the government is more credible then equity prices should:

A) decrease more resulting in lower expected returns.

B) increase more resulting in higher expected returns.

C) increase more resulting in lower expected returns.

D) decrease more resulting in higher expected returns.

---

Answer and Explanation

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.

deqiang

thanks.