Consider the following facts on the world’s stock exchanges (from the Wall Street Journal):

❏ The Dow Jones Industrial Average fell 33% in 2008

❏ Germany’s DAX index slumped 42% in 2008

❏ China’s Shanghai Composite was off 64%

Now answer the questions below.

a. What do these stock market declines mean about the way these markets are related (or comove with each other)?

b. During periods of financial crises (like the one in 2008), why do investors move their capital out of stocks? (Actually, investors have moved more than $100 billion from only three countries – Japan, India and S. Korea.) Where do they place their capital instead and why?

c. Do you think that the tumbling of (major) currencies had anything to do with that massive outflow of capital? (Hint: where would US investors invest if the US dollar were weak relative to other currencies?) What would happen to the values of US investments if the US dollar strengthened?