As more global investors shift investment funds to emerging markets, what factors will drive expected returns?

What will be an ideal response?

Answer: In the past most foreign investors have avoided emerging markets for many reasons, most notably, because of government regulations, restrictions on foreign investments, high transactions costs and significant political risk associated with the markets. As a result, the markets have been segmented and expected returns lowered by the specific risks of the markets. As U.S. and other global investors become more sophisticated in their dealings with emerging markets, the expected returns in these markets will be based more on the contribution of the markets to the systematic risk of the globally-diversified portfolio. The initial impact on prices will be a price jump as expected future cash flows get capitalized at a lower rate. This will mean future lower expected returns from investing in emerging markets.