CFA Practice Question
The asset allocation for a country within a ______ portfolio will be affected by its economic outlook; countries approaching a recession will be ______.
A. local; overweighted
B. global; underweighted
C. global; overweighted
Explanation: Monetary and fiscal policies enacted by national governments influence the countries' aggregate economies, which, in turn, influence all industries and companies within the economies. Some examples are government spending's multiplier effect and the raising of firms' costs due to restrictive monetary policies. Taking a global perspective, the asset allocation for a country within a global portfolio will be affected by its economic outlook - countries approaching a recession will be underweighted, while optimistic economic outlooks would cause an investor to overweight the country.
User Contributed Comments 2
| User | Comment |
|---|---|
| Friso | I don't fully agree, in a passively managed portfolio, a country approaching a recession most likely experienced growth just before that and thus must be currently overweight (which will automatically be corrected in the portfolio, since it will go into recession). Who agrees? |
| thebkr7 | Agreed, but then realized that it might have already reached an economic peak and that has been factored in expecting the next logical stage, a recession. |