If a nation diversifies its capital portfolio so that it owns some foreign capital and foreigners own a percentage of the nation's capital, then:
A) domestic returns will be lower.
B) domestic returns will be higher.
C) domestic returns will equal international returns.
D) the nation will earn an average return, and its consumption will remain stable in the event of output shocks.

Question

Quizplus · Accepted Answer

Diversifying a capital portfolio by owning foreign capital and allowing foreigners to own domestic capital helps a nation to spread its risk. This means that if there's an economic downturn or output shock in the nation, the impact on consumption can be mitigated by the returns from foreign investments. Similarly, foreign investments in the nation can provide stability. This strategy does not necessarily equalize domestic and international returns or guarantee higher or lower domestic returns directly, but it aims to achieve an average return that supports stable consumption levels.

If a Nation Diversifies Its Capital Portfolio So That It