Reading 48: Dreaming With BRICs: The Path to 2050－LOS b capital, returns

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 17: Portfolio Management in a Global Context
Reading 48: Dreaming With BRICs: The Path to 2050
LOS b: Explain why certain developing economies may have high returns on capital, rising productivity, and appreciating currencies.

tycoon

Which of the following best characterizes the relationship between investment capital and economic output in emerging markets?

A) An increase in investment capital will result in a high level of output.

B) An increase in investment capital will result in a low level of output.

C) Investment capital is unrelated to the level of output in emerging countries due to structural inefficiencies.

D) It is not expected that emerging countries will be able to attract the capital necessary to increase output.

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Answer and Explanation

Developing economies have the potential to increase returns on capital and productivity because they are currently operating below the levels of more mature, developed countries. Because developing countries currently utilize relatively low amounts of capital, an increase in investment capital will result in a relatively high level of output.

tycoon

During the period 1960 to 2000, which of the following countries best illustrated the fact that as developing countries mature, their productivity slows?

A) Brazil.

B) India.

C) Japan.

D) Russia.

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Answer and Explanation

As developing countries mature, their returns on capital and productivity will slow. Japan and Germany had very high rates of growth in the post-war 1960s and 1970s, but their growth slowed in later years.

tycoon

Which of the following best characterizes the relationship between per capita income and currency values in emerging markets? Their currencies are currently:

A) above levels predicted by Purchasing Power Parity and will rise in value as per capita income increases.

B) below levels predicted by Purchasing Power Parity and will rise in value as per capita income increases.

C) below levels predicted by Purchasing Power Parity and will fall in value as per capita income increases.

D) above levels predicted by Purchasing Power Parity and will fall in value as per capita income increases.

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Answer and Explanation

When countries have low per capita income levels, their currencies tend to be weak and below levels predicted by Purchasing Power Parity (PPP). As the developing countries mature and income rises, their currencies will appreciate and converge toward the value predicted by PPP.

deqiang

thanks.