LOS a: Discuss financial and economic market integration and explain the theoretical impact on pricing and expected returns when a segmented market evolves into an integrated market.

Q1. Which of the following best describes the pricing of emerging market equities? If an emerging country announces a liberalization program, equity prices will:

A)   rise and the cost of capital will increase.

B)   rise and the cost of capital will decline.

C)   fall and the cost of capital will decline.

Q2. Which of the following best describes the pricing of emerging market equities? If the emerging market transitions from segmented to integrated, the country’s equities will be priced according to its:

A)   covariance risk and its expected returns will be lower.

B)   variance risk and its expected returns will be lower.

C)   covariance risk and its expected returns will be higher.

Q3. Which of the following best describes the pricing of emerging market equities? If an emerging country announces a liberalization program and the government is more credible then equity prices should:

A)   increase more resulting in lower expected returns.

B)   decrease more resulting in lower expected returns.

C)   increase more resulting in higher expected returns.

LOS a: Discuss financial and economic market integration and explain the theoretical impact on pricing and expected returns when a segmented market evolves into an integrated market. fficeffice" />

Q1. Which of the following best describes the pricing of emerging market equities? If an emerging country announces a liberalization program, equity prices will:

A)   rise and the cost of capital will increase.

B)   rise and the cost of capital will decline.

C)   fall and the cost of capital will decline.

Correct answer is B)

When an emerging country announces a liberalization program, equity prices will increase. The rise in equity prices will result in lower expected returns and a lower cost of capital for emerging firms.

Q2. Which of the following best describes the pricing of emerging market equities? If the emerging market transitions from segmented to integrated, the country’s equities will be priced according to its:

A)   covariance risk and its expected returns will be lower.

B)   variance risk and its expected returns will be lower.

C)   covariance risk and its expected returns will be higher.

Correct answer is A)

When an emerging market transitions from segmented to integrated, prices will depend on covariance risk instead of the variance. This is because investors will now be able to include the country’s equities in a portfolio. In a well-diversified portfolio, covariance risk is the only risk important. Equity prices will be higher because the covariance with world markets will be lower than the variance. As prices rise, the expected return for the market should decline as well.

Q3. Which of the following best describes the pricing of emerging market equities? If an emerging country announces a liberalization program and the government is more credible then equity prices should:

A)   increase more resulting in lower expected returns.

B)   decrease more resulting in lower expected returns.

C)   increase more resulting in higher expected returns.

Correct answer is A)

If an emerging country announces a liberalization program and the government is more credible then stock prices should increase more. As prices rise in the newly liberalized market, the expected return for the market should decline.

Thx!