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Consider the following statement about Foreign Portfolio Investment (FPI)
- FPI does not provide investor with direct ownership of financial assets.
- FPI is part of country’s current account.
- FPI is more liquid and more risky than FDI.
Which of the above statements is/are incorrect?
- a)1 only
- b)2 only
- c)2, 3
- d)1, 3
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Consider the following statement about Foreign Portfolio Investment (F...
Incorrect Statements about Foreign Portfolio Investment (FPI):
Statement 2: FPI is part of country's current account.
- This statement is incorrect. FPI is actually a part of the country's capital account, not the current account. The current account records a nation's transactions with the rest of the world involving goods, services, income, and current transfers, while the capital account records the flow of investments into and out of a country.
Statement 3: FPI is more liquid and more risky than FDI.
- This statement is incorrect. In fact, FPI is generally considered to be more liquid but also riskier compared to Foreign Direct Investment (FDI). FPI involves investments in financial assets such as stocks and bonds, which can be easily bought or sold in the market, making them more liquid. However, these investments are also subject to market volatility and can be more risky compared to FDI, which involves establishing a lasting interest in an enterprise in another country.
Therefore, the correct answer is option 'C' - 2, 3.
Statement 2: FPI is part of country's current account.
- This statement is incorrect. FPI is actually a part of the country's capital account, not the current account. The current account records a nation's transactions with the rest of the world involving goods, services, income, and current transfers, while the capital account records the flow of investments into and out of a country.
Statement 3: FPI is more liquid and more risky than FDI.
- This statement is incorrect. In fact, FPI is generally considered to be more liquid but also riskier compared to Foreign Direct Investment (FDI). FPI involves investments in financial assets such as stocks and bonds, which can be easily bought or sold in the market, making them more liquid. However, these investments are also subject to market volatility and can be more risky compared to FDI, which involves establishing a lasting interest in an enterprise in another country.
Therefore, the correct answer is option 'C' - 2, 3.
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Community Answer
Consider the following statement about Foreign Portfolio Investment (F...
FPI consists of securities and other financial assets passively held by foreign investors. It does not provide investor with direct ownership of financial assets. (Statement 1)
In India, FPIs are allowed to invest in various debt market instruments such as government bonds, treasury bills, state development loans (SDLs) and corporate bonds, but with certain restrictions and limits.
FPI is part of country’s capital account and shown on its balance of payments (BOP). (Statement 2)
FPI is more liquid and less risky than FDI. (Statement 3)
In India, FPIs are allowed to invest in various debt market instruments such as government bonds, treasury bills, state development loans (SDLs) and corporate bonds, but with certain restrictions and limits.
FPI is part of country’s capital account and shown on its balance of payments (BOP). (Statement 2)
FPI is more liquid and less risky than FDI. (Statement 3)
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Consider the following statement about Foreign Portfolio Investment (FPI) FPI does not provide investor with direct ownership of financial assets. FPI is part of country’s current account. FPI is more liquid and more risky than FDI.Which of the above statements is/are incorrect?a)1 onlyb)2 onlyc)2, 3d)1, 3Correct answer is option 'C'. Can you explain this answer?
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