Question 3 (6 marks)

You are thinking to invest in some emerging country. Its recent economic growth rate is around 7%, well above the average growth rate of developed countries estimated at 2% by the IMF. Its annual inflation rate is around 10%, well above the average inflation rate of developed countries estimated at 2% by the IMF. The currency of the emerging country has been depreciating at an annual rate of around 8% against major currencies. While the volatility of the World stock index (standard deviation of dollar returns) is around 15%, the stock market of this emerging country has a volatility of 25%. The correlation of this emerging stock market with the World index is only 0.2.

1. Are the high inflation rate and weak currency sufficient reasons to avoid investing in this emerging country? (2 marks)
2. Is the high volatility of the local market a sufficient reason to avoid investing in this emerging country? (2 marks)

Suggest why you would consider investing in this emerging country.