Question

1(a). (TRUE or FALSE?) The absolute purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are no trade barriers.

1(b). (TRUE or FALSE?) In general, the diversification benefits are greater for a portfolio that contains both domestic and foreign securities, rather than domestic securities alone.

1(c). (TRUE or FALSE?) When a country’s currency weakens relative to the currencies of other countries, imported goods become more expensive for citizens of the country with the weakened currency.

Answer 1

a) True

There are two types of purchasing power absolute and relative. The absolute purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are no trade barriers

b) True

Diversification benefit will be greater is stocks are of company belonging to different country . For eg if there is crisis in india , stock of us based company will balance the portfolio

c) true

As home currency weakens, one has to pay more units of home currency to buy one unit of foreign currency, hence making import costlier