Busco is putting together a diversified portfolio of $ 3,500 million. The board of directors is taking into consideration an initial investment in emerging market equities. The treasurer, Mr Sam has made the following 4 comments:
1. “For an investor holding only developed market equities, the existence of stable emerging market currencies is one of several preconditions necessary for that investor to realize strong emerging market performance.”
2. “Local currency depreciation against the dollar has been a frequent occurrence for US investors in emerging markets.US investors have consistently seen large percentages of their returns erased by currency
depreciation. This is true even for long-term investors across emerging markets.”
3. “Historically, the addition of emerging market stocks to a US equity portfolio such as the S&P 500 index has reduced volatility; volatility has also been reduced when emerging market stocks are combined with an
international portfolio such as the MSCI EAFE index.”
4. “Although correlations among emerging markets can change over the short term, such correlations show evidence of stability over the long term. Thus, an emerging market portfolio that lies on the efficient frontier in one period tends to remain close to the frontier in subsequent periods.”
For each of the underlying comment(1-4), s
tate the relevant content of International Financial Management(IFM) and assess whether each of Mr Sam’s comments is incorrect or correct.