You have the option to invest in either Country A or Country B but not both. You

Question

You have the option to invest in either Country A or Country B but not both. You carry out some research and conclude that the two countries are similar in every way except that the returns on assets of different classes tend to move together much more in Country A—that is, they are more highly correlated in Country A than in Country B. Which country would you choose to invest in and why?

You should invest in Country (A/B) as the benefits from diversification are greater / less. If everything else is equal, spreading your risk across different asset classes brings greater benefit when the correlation among the returns is higher /lower.

Explanation / Answer

You have the option to invest in either Country A or Country B but not both. You carry out some research and conclude that the two countries are similar in every way except that the returns on assets of different classes tend to move together much more in Country A—that is, they are more highly correlated in Country A than in Country B. Which country would you choose to invest in and why?

                 I should select the country B compare to country A. As the country A is high risk and also gives high return on our investment. But in country A has high systematic risk as well as idiosyncratic risk.

The key rule of investment in any country depends on the return and risk factor in their different sector. The way to achieve a balanced portfolio is to own investments that do not move any same direction and do not produce the same return. Risk in a investment is unpredictable and it can be idiosyncratic and systematic risk. Idiosyncratic risk or unique risk is affecting a small number of people but no one single, which is when one firm is not able to perform well to other market and the share of all economic activity may shrink. Idiosyncratic risks come in two types, one set of firm is affected in one way and other firm is another way.

Systematic risk is the risk where those affecting everyone where the entire industry will do poor at the same time. The entire economy could slow for reasons that are completely unrelated to any individual performance.

As the different sector in country A is highly correlated compare to country B, then invest in country B will more profitable than country A.

So, I should invest in Country (B) as the benefits from diversification are greater. If everything else is equal, spreading your risk across different asset classes brings greater benefit when the correlation among the returns is lower.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.