FIN3013 MAY 2021 (40 Marks) 4. (1) "Firms with global operations will give you international diversification". Do you agree with this statement? Take into account both business risk and foreign exchange risk. (ii) A firm is adding investment in the stock market of a developing country in their Emerging Markets Fund. This economy is well diversified across manufacturing and agriculture industries, has natural resources and a growing finance sector. It is characterised by large transaction costs in capital markets due to high commissions and taxes on securities trades. Information on financial performance of companies are widely available to the public because of good accounting standards and detailed disclosure requirements. A government agency strictly regulates capital inflows and outflows in the country and foreign ownership of company securities. Non-residents face long delays in settling trades because of the settlement procedures under these foreign ownership rules. The country's senior finance officials are working on the deregulation of capital flows and foreign ownership However, the firm's political consultant believes that real progress cannot be made in the near future because of the country's isolationist sentiment. Given the economic environment in the country, discuss the arguments in favour of active investment and arguments in favour of index investing. Do you think the firm should invest in this economy actively or by indexing? (60 Marks) (Total 100 Marks)