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CFA Level I · CFA Level I Exam · Introduction to Geopolitics

A country's government announces it may restrict foreign ownership of domestic assets and impose capital controls if tensions with trading partners escalate. An analyst evaluating a multinational's exposure to this situation should most likely consider that the risk is best described as:

The risk is best described as one that can affect cross-border investment flows and a firm's ability to repatriate earnings. Capital controls and ownership limits hit foreign investors directly. It is not limited to domestic firms, and diversification does not reliably remove such spillover effects.

  1. Aa source of risk limited to the country's own domestic firms
  2. Ba risk that can affect cross-border investment flows and the firm's ability to repatriate earningsCorrect
  3. Ca diversifiable risk that disappears once a portfolio holds many countries

Explanation

Capital controls and ownership restrictions directly affect foreign investors' ability to move capital and repatriate profits, so a multinational with operations there is exposed. The risk is not confined to domestic firms, and geopolitical shocks can spread across markets, so diversification does not necessarily eliminate it.

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