Using the data in the following table, calculate the national beta for Country A and Country B and determine which country is most likely an emerging market.
Note: rx, U.S. represents the correlation coefficient between Country X and the U.S. index.
Which of the following statements about Country A and Country B is FALSE?
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A. B. C. D.A
The equation for the national beta is as follows:
As shown above, the beta for Country A is less than the beta for Country B. Country A is most likely the emerging market because of its lower correlation with the
U.S, the lower Beta, and the higher risk (standard deviation).
Because of the low correlations with the U.S. market, adding either asset to a domestically-only diversified portfolio will reduce risk. The principle of diversification holds even for risky assets.