Question 66

An increase in international stocks and a decrease in corporate bonds in a portfolio will increase political risk.

Investing in international stocks exposes a portfolio to political risk, as these investments can be significantly affected by changes in government policies, regulations, or stability in the countries where the stocks are based.

A) Credit

Credit risk refers to the possibility that a borrower will default on a loan or obligation. In this context, while a decrease in corporate bonds might imply a lower exposure to credit risk, the focus of the question is on international stocks and their associated risks, not directly on credit risks from bonds.

B) Political

Political risk is heightened with an increase in international stocks due to the potential for instability or unfavorable changes in government in the countries where these stocks are issued. This risk can significantly impact the performance of international investments, making it the correct choice in this scenario.

C) Interest rate

Interest rate risk relates to the impact of changes in interest rates on the value of investments. While corporate bonds are sensitive to interest rate changes, the question specifically addresses the effects of international stocks, which do not directly correlate with interest rate risk in the same way.

D) Reinvestment

Reinvestment risk involves the potential for an investor to face lower returns when reinvesting the cash flows from an investment, typically in a declining interest rate environment. This type of risk is not specifically affected by an increase in international stocks or a decrease in corporate bonds in the manner outlined in the question.

Conclusion

Political risk is the key concern when shifting investments towards international stocks, as they can be heavily influenced by external political factors. Other options such as credit, interest rate, and reinvestment risks do not directly relate to the changes in portfolio composition described in the question. Thus, option B stands out as the most relevant type of risk that increases with the given investment strategy.