Foreign common stocks are ownership shares in companies based outside the United States. These stocks allow investors to diversify their portfolios and gain exposure to international markets. However, investing in foreign stocks also comes with unique risks, such as currency fluctuations, political instability, and differences in accounting standards.
Which of the following is a negotiable certificate issued by a U.S. bank representing a specified number of shares in a foreign stock?
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A) American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares in a foreign stock. B) Global Depositary Receipt (GDR) is a negotiable certificate issued by an international bank representing a specified number of shares in a foreign stock. C) International fund is a mutual fund that invests in stocks from multiple countries outside of the United States. D) Exchange-traded fund (ETF) is an investment fund that holds a basket of stocks and is traded on a stock exchange.
What is the primary risk associated with investing in foreign common stocks?
A) Interest rate risk is the potential for loss due to changes in interest rates, which primarily affects bonds. B) Credit risk is the potential for loss due to a borrower's inability to repay a loan or meet their financial obligations, primarily affecting bonds. C) Currency risk is the potential for loss due to fluctuations in exchange rates between the investor's home currency and the currency of the foreign stock. D) Inflation risk is the potential for loss due to the erosion of purchasing power caused by rising prices, which affects all investments.
Which type of investment vehicle provides exposure to a diversified portfolio of foreign stocks?
A) Domestic mutual fund typically invests in stocks or bonds from companies based in the United States. B) International fund is a mutual fund that invests in stocks from multiple countries outside of the United States. C) Corporate bond is a debt security issued by a company that pays interest to investors. D) Preferred stock is a type of stock that typically pays fixed dividends and has priority over common stock in the event of a company's liquidation.
In the late 1990s, many investors sought to capitalize on the rapid growth of emerging markets, particularly in Asia. However, the Asian financial crisis of 1997-1998 led to significant declines in the value of many foreign stocks, highlighting the risks associated with investing in these markets.
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Example Series 65 Example Practice Question
Investors looking to diversify their portfolio might purchase shares of a foreign company, such as Toyota Motor Corporation, based in Japan. By doing so, the investor gains exposure to the Japanese market and the global automotive industry but also takes on risks related to currency fluctuations and potential changes in Japanese government policies.