The key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

Question

BlackTom AI · Accepted Answer

The question presents two answer choices, True and False, about the idea behind international diversification.
Option 1: True. The statement claims that the key to international diversification is selecting foreign projects whose performance levels are highly correlated over time. In portfolio diversification, a core goal is to reduce overall risk by combining investments that do not move in lockstep. High correlation between foreign projects means they tend to move together; this diminishes the diversification benefit because downturns and upturns are synchronized rather than offsetting. Consequently, treating high correlation as the key would undermine the purpose of diversification, making this option conceptually flawed.
Option 2: False. This assertion would align with established diversification principles: the value of international diversification comes from including assets whose returns are not perfectly correlated, ideally with low or negative correlations. When foreign projects or markets are less correlated, adverse events in one market are less likely to coincide with those in another, which helps smooth overall portfolio returns. Misconceptions often arise by assuming more similarity across markets equates to better diversification, but familiarity and common shocks across economies can actually exacerbate risk if correlations are stronger. 
Option 1’s premise hinges on a high cross-market correlation, which tends to reduce diversification benefits, whereas the essence of international diversification is precisely to seek lower correlations to improve risk-adjusted performance. The second option correctly aligns with that foundational idea, while the first option misstates the fundamental mechanism of diversification. However, the analysis focuses on explaining the logical structure of both statements rather than declaring a correct alternative outright, keeping the reasoning centered on concepts of correlation and diversification.

BUSFIN 4250 SP2025 (4534) Final Exam

The key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

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BUSFIN 4250 SP2025 (4534) Final Exam

The key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.

查看解析

登录即可查看完整答案

类似问题

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………… could be eliminated by portfolio diversification.

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