Question

Why might it be easier for an investor desiring to diversify his portfolio internationally to buy depository receipts (ADRs) rather than the actual shares of the company? (Check all that apply.)

a) The investor can purchase a depository receipt directly from a domestic broker.
b) Dividends from an ADR are received in the foreign currency.
c) The ADR represents a package of the underlying foreign security.
d) An ADR must be purchased on an international exchange.
e) An ADR can be purchased on the investor's domestic exchange.
f) An ADR is priced in a currency foreign to the investor.
g) An ADR is priced in the investor's local currency.
h) Dividends from an ADR are received in the local currency.

Answer 1

Investors may find it easier to buy ADRs rather than actual foreign shares due to the convenience of purchasing through a domestic broker, dealing with transactions and dividend payments in local currency, and accessing them through the domestic exchange.

Step-by-step explanation:

For an investor looking to diversify their portfolio internationally, purchasing depository receipts (ADRs) offers several advantages over buying actual shares of a foreign company. These include:

• (a) The investor can purchase a depository receipt directly from a domestic broker, making the transaction easier and more accessible.
• (e) An ADR can be purchased on the investor's domestic exchange, simplifying the process and providing familiar regulatory protections.
• (g) An ADR is priced in the investor's local currency, eliminating the need to deal with exchange rates for the initial transaction.
• (h) Dividends from an ADR are received in the local currency, simplifying income streams from the investment.

Conversely, some of the incorrect options are (b) which states that dividends from an ADR are received in foreign currency (when they are actually paid in local currency), (d) suggesting that an ADR must be purchased on an international exchange (whereas it's actually on the domestic one), and (f) suggesting that an ADR is priced in a currency foreign to the investor (also incorrect as it is priced in local currency).