2011 Mock - Question 48

Can somebody please explain this answer - and where can I find a reference for this in Schweser or CFAI text.

Not sure if somebody can help me with this one? Won’t increasing integration between developed and emerging markets result in attractive emerging market equity returns. Once they are more integrated, capital and technology flow will be easier to these emerging markets?

This is pretty much word for word from the book on Emerging markets. Sorry.

Okay - will have to glance through this again.

The answer key gives you a page reference.

Cool - thanks a lot!!

Increased global market integration for emerging markets leads to decreased expected returns due to an overall reduction in risk. As they get more integrated they attract foreign capital and become less reliant on doestic forces which drives a reduction in risk premium.


I want to challenge choice C. What about contagion? That is the result of the spread of crises, so it can happen.

The correct choice is B. Contagion will happen in the local (emerging) region - correlation between emerging and developed markets will remain low and hence portfolio will be exposed to minimal risk.

No, contagion occurs when crisis spread to other countries. Correlations increase in times of crisis. It’s right from the CFAI book. Volume 4 Pg 402.

Yes - but contagion will not necessarily spread to developed countries like UK/US - hence you can diversify the portfolio.

in reading35 integration leads to price up return down financing cost down