LOS c: Discuss the effect of a country’s classification as either a developed or an emerging market can have on market indexes and on investment in the country's capital markets.

Q1. 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% in local currency terms and 30% in dollar terms. The country of Tinia is still classified as an emerging market. Its return over the last year was 42% in local currency terms and 28% 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)   Galdavia will more easily raise capital due to its classification as a developed market.

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

Q2. When a country moves from being classified as an emerging market to a developed market which of the following statements is FALSE?

A)   The country’s 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’s stock will increase in liquidity.

Q3. 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)   smaller proportion of the index and will find raising capital more difficult.

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

LOS c: Discuss the effect of a country’s classification as either a developed or an emerging market can have on market indexes and on investment in the country's capital markets. fficeffice" />

Q1. 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% in local currency terms and 30% in dollar terms. The country of Tinia is still classified as an emerging market. Its return over the last year was 42% in local currency terms and 28% 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)   Galdavia will more easily raise capital due to its classification as a developed market.

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

Correct answer is B)

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, Galdavia’s growth should increase.

Q2. When a country moves from being classified as an emerging market to a developed market which of the following statements is FALSE?

A)   The country’s 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’s stock will increase in liquidity.

Correct answer is B)

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.

Q3. ffice:smarttags" />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)   smaller proportion of the index and will find raising capital more difficult.

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

Correct answer is C)

When a country moves from being classified as an emerging market to a developed market, the country’s 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.

Thx!