1. What happens to the portfolio standard deviation as the investor substitutes the foreign securities for the U.S. securities? What combination of U.S. and Japanese stocks and U.S. and Brazilian stocks minimizes risk?

2. Even though the risk reduction is greater for the Brazilian fund, why may the U.S. investor prefer the Japanese fund?

3. Should a Japanese investor who owns only Japanese stocks acquire U.S. stocks?

4. How would each of the following affect a U.S. investor’s willingness to acquire foreign stocks?

a) The dollar is expected to strengthen.

b) Inflation in the foreign country is expected to increase.

c) Globalization of financial markets should accelerate.

Floria Scarpia believes that many of her clients could benefit from using international investments to diversify their portfolios, but many are reluctant to invest abroad—especially since they may be unfamiliar with foreign economies and businesses. Previously, all suggestions to diversify internationally have met resistance. At best, clients have been willing to invest in U.S. firms with international operations, such as

Coca-Cola or IBM.

Proportion Invested in          Proportion in the

the U.S. Fund                        Foreign Fund

100% ……………………….             0%

90 ……………………….                  10

80 ……………………….                  20

70 ……………………….                  30

60 ……………………….                  40

50 ……………………….                  50

40 ……………………….                  60

30 ……………………….                  70

20 ……………………….                  80

10 ……………………….                  90

0 ……………………….                    100%