Asked by karyme catano on Jul 15, 2024
Verified
The straightforward generalization of the simple CAPM to international stocks is problematic because
A) inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ.
B) investors in different countries view exchange-rate risk from the perspective of different domestic currencies.
C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio.
D) All of the options are correct.
E) None of the options are correct.
CAPM
The Capital Asset Pricing Model, a finance theory that describes the relationship between systematic risk and expected return for assets, particularly stocks.
International Stocks
Shares of companies located outside the investor's home country, offering a way to diversify investment portfolios across global markets.
Consumption Baskets
A collection of goods and services used to represent what is consumed by a typical household, employed in calculating the cost of living and inflation.
- Grasp the fundamental tenets of risk and return in cross-border portfolios, including the significance of diversification and the influence of exchange rate movements.
Verified Answer
DM
Danielle MeerbeekJul 17, 2024
Final Answer :
D
Explanation :
The straightforward generalization of the simple Capital Asset Pricing Model (CAPM) to international stocks is problematic due to various factors including differing inflation-risk perceptions across countries, differing views on exchange-rate risk due to different domestic currencies, and practical barriers such as taxes, transaction costs, and capital barriers that make it difficult for investors to hold a world-index portfolio.
Learning Objectives
- Grasp the fundamental tenets of risk and return in cross-border portfolios, including the significance of diversification and the influence of exchange rate movements.