2011 Mock Question 46 2011, should

LPoulin133

I am wondering why the answer to this should not be C. I feel C is more valid than B.

Windjam

Currency risk can be minimized diversifying across markets, not eliminated.

susana

But C says that "correlations between equity and currency markets are so low that overall currency risk is minimal" - which is not true for all markets. I feel C is also a problem.

pennyless

B is the worst answer.

infinitybenzo

So Paraguay - do you feel C could be an answer - not sure if I got you?

Roflnadal

Seems pretty straight forward to me. You CANNOT eliminate currency risk via diversification - you must use forwards for that. Thus, the fact that he says you can ELIMINATE currency risk via diversification is blatantly wrong.

Windjammer

But is it not blatantly wrong to assume that "correlations between equity and currency markets are so low that overall currency risk is minimal"?

Unforseen

manishsd Wrote:
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> But is it not blatantly wrong to assume that
> "correlations between equity and currency markets
> are so low that overall currency risk is minimal"?

Not really, have you traded EU/US/JPY risk convergence in the last 3 years?

bodhisattva

Nope - sorry!!

mp3bu

manishsd Wrote:
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> Nope - sorry!!

Developed market equities have had a very high inverse correlation. Long term this has held well.

Developing have positive correlation between equities and currency.