Foreign Investment Risk
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What are unique risks associated with foreign investments? How might an investor protect his/her portfolio against these risks? Is it possible to protect a portfolio from all types of risk? Explain your answer.
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Solution Summary
The solution describes the unique risks associated with foreign investment and details how an investor might hedge against these risks.
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There are several risk variables unique to foreign investment, the most important of which, perhaps, are currency exchange related risks and governmental policy/regulatory bodies. With exchange rate risk, the investor might find it relatively easy to capture a profit from a foreign investment only to find a sustained loss when translating the earnings into domestic currency. For example, with everything being held equal, an investor manages to make a handsome 14% return in the European market only to find that a strong dollar yields a loss after the profit in ...
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