time J. Financ. Quant. Anal. 42.915-940. een ace, ller EXERCISES the 13. A rapid increase in capital inflow could harm an economy. It could Carrieri, F, Errunza, V., Hogan, K., 2007. Characterizing world market integration through an outcome crisisa of currency . cause an appreciation of the recipient country's currency and reduce competitiveness of exporting industries. 1. Explain how investment flows can be motivated by interest rate differ- entials and still allow two-way capital flows between countries. 2. What is the difference between systematic and nonsystematic risk? is Give examples of both risks. nly 3. Explain how portfolio diversification can reduce risk. 4. Explain why US portfolios do not have a large enough international es- diversification. 5. Assume that you have a choice of two assets, A and B, and a portfolio ild of an equal share of the two assets. Assume also that the assets have the following statistics: re: Variance Covariance ns- Return ed Asset A 20% Asset B 16% my mean? FURTHER READING -0.01 0.10 0.02 a. What does the negative covariance between the assets A and B b. As a risk-averse investor, would you choose the asset A, B, or the portfolio? Explain your reason. he ne ne Ditin fahmukler, S.L., 2013. Unexploited gains from international diver- The world. Rev. Econ. Stat