Another poor question.

CFA Level II
#1

George Go, CFA, a U.S. domestic investor, wishes to diversify his domestic portfolio. Which of the following investment alternatives offer the lowest diversification benefit primarily because of its high correlation to U.S. markets? A) Closed-end country funds. B) American Depository Receipts. C) Exchange Traded Funds. Answer is A which I put, but how can C not have a high correlation with the US exchange?

#2

because international exchange traded funds are not highly correlated to the us. international closed end funds are–its been documented and is an anomoly of efficent markets. thats why international closed end funds often trade at a premium or discount

#3

It says no where they are international exchange traded funds…

#4

but it doesnt say they cant be. and btw before i meant at a discunt, not a at a premium or discount

#5

Ok, can someone explain to me why the answer isn’t B?

#6

C if they mean U.S. ETF’s. Otherwise, the question could mean anything.

#7

ADR’s are not U.S. stocks, so they are usually not correlated with U.S.

#8

Dreary Wrote: ------------------------------------------------------- > ADR’s are not U.S. stocks, so they are usually not > correlated with U.S. Right, maybe my thought process is a bit messed up here. Although they aren’t US companies and are independent of the US economy, they are traded on US markets and are denominated in dollars. And if I recall correctly, Level 3 ADR’s have the capability of raising capital on US exchanges and have to file with the SEC just like everyone else. So what it really boils down to is whether they are referring to the general economy or market mechanics.

#9

Assuming that fundamentals is what drives the stock up/down, a tanking US market will not directly affect the company’s performance/operating results in their local market.

#10

Since ADRs are listed on the US exchange, they are subject to the US investor’s risk appetite. Today was a great example of this. Look at Chinese ADRs for example and see the dip around 3PM. That’s not related to the Chinese companies fundamentals, but US investors… and when the market in China will open, the prices will converge.