In deciding where to invest your money, you read that Italy looks like it's well positioned to capitalize on the opening of Central Europe, especially since many of the countries joined Italy in the European Union
But the U.K. is experiencing weak growth high interest rates, and high inflation. Which of the two countries would be more attractive to invest in? Explain.
Answer: Rational investors will already have factored these expectations into the prices of assets in these countries. As events diverge from the expected, stock prices will adjust to reflect the new expectations so that at any point in time the expected risk-adjusted return from investing in different countries and assets will be the same. And the fact that the risks noted in the question are likely to be uncorrelated with each other, especially the U.K. and Central Europe, should increase the diversification benefits from the investment in both the U.K. and the Central European nations.
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Which of the following statements strengthens the proposition that free trade is beneficial to nations?
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