Reading 45: The Case for Inter....Diversification－LOS h investing, potential

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 17: Portfolio Management in a Global Context
Reading 45: The Case for International Diversification
LOS h: Discuss the potential barriers to international investing.

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Which of the following is NOT a reason why foreign markets have less liquidity than domestic markets?

A) The market capitalization is lower in foreign markets.

B) There are government restrictions on the amount of equity that institutions can hold.

C) The price impact of trades in foreign markets is usually higher.

D) The turnover of foreign stock markets is higher due to price manipulation.

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Answer and Explanation

Although there is a higher frequency of price manipulation in foreign markets, this does not directly impact turnover. Smaller market capitalizations in these markets, government restrictions on institutional ownership, and the higher price impact from trading does limit the liquidity in these markets.

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Which of the following is NOT a barrier to investing in foreign security markets?

A) There is often a lack of familiarity with foreign markets.

B) There is often high political risk in lesser developed countries.

C) Management fees are usually higher in foreign countries.

D) The high commissions in foreign bond markets.

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Answer and Explanation

The commissions in foreign bond markets are usually quite low. However, there is a lack of familiarity with foreign markets, usually higher political risk and management fees, all of which will create barriers to foreign investment.

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Which of the following statements regarding foreign security markets, relative to U.S. security markets is FALSE?

A) Trading costs are usually higher.

B) Insider trading is more vigorously enforced.

C) Withholding taxes are often assessed.

D) Institutional investors are often restricted on the amount of stock they can own.

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Answer and Explanation

Insider trading in foreign markets is usually less vigorously enforced. Trading costs are usually higher, withholding taxes are often applied, and institutions are often restricted on the amount of shares they can own.