Reading 32: International Equity Benchmarks－LOS c country, capital, emerging, developed, investment

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CFA Institute Area 8-11, 13: Asset Valuation
Session 10: Equity Portfolio Management
Reading 32: International Equity Benchmarks
LOS c: Discuss the effect of a countrys classification as either a developed or an emerging market can have on market indexes and on investment in the country's capital markets.

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Ireland recently moved from being classified as an emerging market to a developed market. Ireland will now represent a:

A) larger proportion of the index and will raise capital more easily.

B) larger proportion of the index and will find raising capital more difficult.

C) smaller proportion of the index and will find raising capital more difficult.

D) smaller proportion of the index and will raise capital more easily.

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Answer and Explanation

When a country moves from being classified as an emerging market to a developed market, the countrys stock will represent a smaller proportion of a developed world index where other countries in the index will be larger in size than in the emerging index. The country should have an easier time raising capital because developed countries stocks have more liquidity.

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When a country moves from being classified as an emerging market to a developed market which of the following statements is FALSE?

A) The countrys returns will represent a smaller proportion of the stock index.

B) The country will have a more difficult time raising capital due to the higher returns of emerging stocks.

C) The country will represent a smaller proportion of the index.

D) The countrys stock will increase in liquidity.

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Answer and Explanation

When a country moves from being classified as an emerging market to a developed market, the country should have an easier time raising capital because developed countries stocks have more liquidity. The country and its stock will represent a smaller proportion of a developed world index where other countries in the index will be larger in size than in the emerging index.

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The country of Galdavia recently moved from being classified as an emerging market to a developed market. Its return over the last year was 40 percent in local currency terms and 30 percent in dollar terms. The country of Tinia is still classified as an emerging market. Its return over the last year was 42 percent in local currency terms and 28 percent in dollar terms. Which of the following statements regarding Galdavia and Tinia is TRUE?

A) Galdavia will more easily raise capital due to its higher returns in U.S. dollars.

B) Tinia will more easily raise capital due to its higher returns in local currency.

C) Tinia will more easily raise capital due to its classification as an emerging market.

D) Galdavia will more easily raise capital due to its classification as a developed market.

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Answer and Explanation

When a country moves from being classified as an emerging market to a developed market, the country should raise capital more easily because developed countries stocks have more liquidity. With more capital access, Galdavias growth should increase.