1.

Reduction in energy costs due to displacement of gasoline cars is most likely a type of:

A. event risk.

 B. thematic risk.

C. exogenous risk.

Explanation

Geopolitical risks

Type Description

Known event date, unknown event outcome

Event risk
(eg, political election, new legislation)

Unanticipated event (eg, sudden uprisings, impact

Exogenous risk
from natural disasters)

Known risks that evolve over time (eg, displacement

Thematic risk
of fuel vehicles, rise of political factions)

Geopolitical risks can have major impacts on investment returns globally and can be identified as different risk types: event risk, exogenous risk,
and thematic risk. Analysts often model such risks as a part of their investment decision-making process.

Thematic risks arise from events that evolve over a long period of time, such as climate change, rising political trends, and technological
innovation. For example, the reduction in energy costs due to the displacement of gasoline cars is a thematic risk. This phenomenon may
be driven by the gradual passage of climate-friendly regulations and may negatively affect major oil-producing economies.

Event risk describes the uncertain outcome of an event that will occur on a known date. For example, the date of a US presidential election
is known, but the winner is unknown until the event occurs (Choice A).

Exogenous risk describes sudden or unanticipated geopolitical risk. One example is the aftermath of a sudden natural disaster, such as the
Mount St. Helens eruption in 1980, which caused significant environmental harm in parts of the US and Canada (Choice C).

Things to remember:
Geopolitical risks can be identified as different types: event risk, exogenous risk, and thematic risk. Event risk describes the uncertain outcome of
a known event. Exogenous risk describes the risk from an unanticipated event. Thematic risk refers to risks that evolve over a long period of time.

Describe geopolitical risk

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2. Which of the following is least likely a reason for a country to cooperate with its neighbors? The country lacks:

A. economic resources.

 B. trade protections for domestic producers.

C. national security and defense capabilities.

Explanation

Motivations for political cooperation

Protect against external threats

National security or
Access vital resources that are scarce or unavailable
military interest
domestically

Secure essential resources through trade

Economic interest Standardize international production and/or trading
protocols to achieve fairness

Cultural considerations Promote cultural exchange to strengthen international ties

Political relationships among countries can be cooperative or noncooperative based on a country's national interest at any given time. A country's
military, economic, and/or cultural aims can influence its degree of cooperation with other countries.

For example, if a country lacks protections for its domestic producers from foreign competition, it may be motivated to cooperate less with
foreign countries by imposing tariffs that favor domestic purchases over foreign purchases.

(Choice A) A country lacking vital economic resources is likely to cooperate with other countries to gain access to such resources at favorable
terms.

(Choice C) A country lacking national security and defense capabilities is likely to cooperate with other countries to prevent and/or mitigate
military threats.

Things to remember:
Political relationships among countries can be cooperative or noncooperative based on a country's national interest at any given time. A country's
military, economic, and/or cultural aims can influence its degree of cooperation with other countries to promote its own wellbeing.

Describe geopolitics from a cooperation versus competition perspective

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3. A country will most likely seek geopolitical cooperation if it:

A. has a strong military supported by advanced technology.

B. possesses a seaport that acts as a center for global trade.

 C. engages in many large cross-border financial transactions.

Explanation

Motivations for political cooperation

Protect against external threats

National security or
Access vital resources that are scarce or unavailable
military interest
domestically

Secure essential resources through trade

Economic interest Standardize international production and/or trading
protocols to achieve fairness

Cultural considerations Promote cultural exchange to strengthen international ties

Political relationships among countries can be cooperative or noncooperative based on a country's national interest at any given time. A country's
military, economic, and/or cultural aims can influence its degree of cooperation with other countries to promote its own wellbeing.

Standardization is a form of cooperation that refers to standardizing protocols pertaining to cross-border trade and capital flows among
countries. In this scenario, a country is likely to cooperate with other countries in following standardized protocols for large cross-border financial
transactions. Doing so will help promote cross-border economic prosperity when all parties follow the same rules of engagement for conducting
business.

(Choice A) When considered by itself, having a strong military does not provide incentive for a country to cooperate more with others. However,
a country with a weak military has incentive to cooperate with others to avoid the need for national defense.

(Choice B) When considered by itself, a country with a seaport that facilitates global trade is not incentivized to cooperate with other countries. A
landlocked country without international hubs has incentive to cooperate with other countries in order to obtain resources more easily.

Things to remember:
Standardization is a form of cooperation that refers to standardizing protocols pertaining to cross-border trade and capital flows among countries.
Standardization helps promote cross-border economic prosperity when all parties follow the same rules of engagement for conducting business.

Describe geopolitics from a cooperation versus competition perspective

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4. A country is experiencing economic difficulties due to persistent, large balance-of-trade deficits. The most appropriate organization to assist that
country is the:

A. World Bank Group (World Bank).

B. World Trade Organization (WTO).

 C. International Monetary Fund (IMF).

Explanation

The International Monetary Fund (IMF) engages in the broadest range of activities compared to the other international organizations. The IMF's
responsibilities fall into four main categories: addressing international monetary problems; facilitating growth of trade and poverty reduction;
supporting exchange rate stability; and lending foreign exchange to address balance of payments problems.

IMF loans are temporary and are not considered foreign aid or a source of long-term funding. Loans are made only with adequate safeguards (ie,
senior creditor status) and only after countries have filed a plan with the IMF to resolve their difficulties.

(Choice A) The World Bank Group (World Bank) is primarily involved (through affiliate organizations) in long-term lending to facilitate economic
development in developing countries. The World Bank also provides advice and analysis to foster economic and social improvements. It does not
directly assist in resolving problems due to trade imbalances.

(Choice B) The World Trade Organization (WTO) fosters global trade through a variety of means. It administers bilateral and multilateral trade
agreements as well as related dispute resolution. The WTO seeks to reduce tariffs and non-tariff barriers to trade. It does not help resolve
problems involving trade imbalances.

Things to remember:
The International Monetary Fund makes foreign exchange loans to countries experiencing balance of payments problems. IMF loans are
extended under very strict guidelines and are intended as temporary funding, not as foreign aid or a source of long-term financing.

Describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary
Fund, and the World Trade Organization
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5. Three geopolitical risks may affect a country's investment returns:

Event Risk Likelihood Velocity Impact Size Impact Breadth

A High High Moderate Discrete

B Moderate High High Broad

C High Medium Low Broad

Within the context of a country's investment returns, based on only the above information, which event warrants the highest level of risk
assessment?

A. Event A

 B. Event B

C. Event C

Explanation

Event risk Likelihood Velocity Impact size Impact breadth

A High High Moderate Discrete

B Moderate High High Broad

C High Medium Low Broad

Analysts evaluate geopolitical risks to gauge their potential impact on investment returns. To do so, an analyst collectively assesses an event's:

Likelihood (ie, probability of the event)

Velocity of the impact (ie, how quickly the event may impact investment returns)
Size and nature of the impact (ie, how large the impact may be, and its overall reach)

In this scenario, Event B poses the most significant risk. Even though it has only a moderate probability of occurring, its impact on the country's
economy will be fast, intense, and broad-based if it occurs. As an example, pandemics do not occur frequently, but when a pandemic occurs, its
disastrous impact on an economy will be swift.

(Choice A) Although Event A has high probability and high velocity, its impact is moderate and discrete (ie, narrowly limited to one sector or to a
few sectors). Therefore, its threat is not as significant as Event B's.

(Choice C) Compared with Event B, Event C has lower impact and takes longer to move the market.

Things to remember:
Analysts evaluate geopolitical risks by assessing the likelihood of occurrence, velocity of impact, and size and nature of impact. Likelihood
measures the probability of a risk's occurrence, velocity gauges how quickly the risk may impact portfolio returns, and size and nature measure the
impact's magnitude and breadth (eg, discrete sector versus overall economy).

Describe geopolitical risk

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6. The growth in populism is most likely consistent with which type of geopolitical risk?

A. Event

 B. Thematic

C. Exogenous

Explanation

Geopolitical risk types

Risk Characteristics Examples

Specific date
Event Country elections
Known risk

Climate change
Ongoing
Thematic Cyber threats
Known and evolving risk
Terrorism

Surprise Natural disaster

Exogenous
Unknown risk Pandemic

Geopolitical risk represents the risk from political changes, natural disasters, and other factors that affect international relations. Risks differ in
their timing and predictability. Thematic risks are known and can remain present for an extended period as they evolve and change in scope or
frequency. Awareness of a thematic risk allows companies and investors to manage the risk through preparation.

Populism is a type of political movement and a known risk that continues evolving over time. Therefore, a growth in populism is a thematic
geopolitical risk and, as such, its potential effects can be incorporated by investors into their risk analysis.

(Choice A) Event risks (eg, government elections) occur on specific dates that are known in advance. In contrast, political movements such as
populism develop over time and thus are not considered specific events.

(Choice C) Exogenous risks involve surprising events that are often uncontrollable, whereas a political movement is a more predictable and
ongoing risk.

Things to remember:
Thematic geopolitical risks are known and continue evolving and changing in scope or frequency over time. Awareness of thematic risks allows
companies and investors to manage the risks through preparation. A growth in populism is considered a thematic geopolitical risk.

Describe geopolitical risk

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7. A developing economy needs long-term financing to fund infrastructure improvements and facilitate general economic growth. According to its
mission, which of the following organizations is most appropriate to provide the financing?

 A. World Bank Group (World Bank)

B. International Monetary Fund (IMF)

C. International Trade Organization (ITO)

Explanation

At the Bretton Woods Conference in 1944, three global organizations were created to facilitate economic activity:

World Bank Group (World Bank),

International Monetary Fund (IMF), and
International Trade Organization (ITO).

The World Bank's primary mission is to facilitate economic and social development in emerging economies. The World Bank largely
accomplishes its mission by providing long-term, low- or no-interest loans through the International Bank for Reconstruction and Development
(IBRD) and the International Development Association (IDA), which are affiliated organizations. The World Bank also provides advice and analysis
to foster economic and social improvements in developing countries.

(Choice B) The IMF is primarily responsible for addressing international monetary problems to encourage economic growth and reduce poverty,
supporting exchange rate stability, and lending foreign exchange to address balance of payments problems.

(Choice C) The ITO was never ratified by the United States and was replaced by the General Agreement on Trade and Tariffs (GATT) in 1948.
GATT remained the international framework governing trade until 1995, when it was replaced by the World Trade Organization (WTO), whose
mission is to facilitate trade.

Things to remember:
The World Bank Group's (World Bank's) primary mission is to facilitate economic development in emerging economies. The World Bank largely
accomplishes its mission by providing long-term, low- or no-interest loans; advice; and analysis to developing countries to foster economic and
social improvements.

Describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary
Fund, and the World Trade Organization
LOS

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8. Which archetype of globalization and cooperation provides the greatest contrast to multilateralism?

 A. Autarky

B. Hegemony

C. Bilateralism

Explanation

Globalization describes how companies, governments, and people transact across the world. Globalization involves some level of cooperation
across countries to promote the exchange of information, goods and services, technology, and jobs. In modern times, both state and non-state
actors (eg, companies) are the drivers behind globalization to access resources, markets, and profits across borders.

In contrast, anti-globalization or nationalism is characterized by limited cooperation with other countries to promote a country's own self-interest.
Historically, nationalistic governments have practiced policies that at times negatively impacted other countries.

Most countries can be labeled as an archetype that falls on the spectrum of globalization and cooperation. A country that practices multilateralism
(eg, Singapore) is very cooperative and open to globalization. Multilaterally oriented countries typically adopt beneficial trade terms to facilitate
international business. In contrast, autarky describes a country that adopts nationalistic policies and seeks self-sufficiency through limited trade
and little cooperation.

(Choice B) Hegemony describes countries that are open to globalization but less cooperative (eg, United States, Russia, China). Hegemonic
countries are often powerful global leaders who exert significant economic and political influence worldwide.

(Choice C) Bilateralism is characterized by regionalism, where two countries cooperate with each other. Countries that practice bilateralism
typically have customized relationships with each partner.

Things to remember:
Most countries can be labeled as an archetype that falls on the spectrum of globalization and cooperation. Multilateral countries are very open to
globalization and cooperative; they typically adopt beneficial trade terms to facilitate international business. In contrast, autarky describes a
country that adopts nationalistic policies and seeks self-sufficiency through little cooperation.

Describe geopolitics and its relationship with globalization

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9. Which of the following best describes the mission of the World Trade Organization? The organization promotes:

A. the economic development of emerging economies through trade.

B. exchange rate stability, leading to a greater willingness among countries to trade.

 C. free trade by providing the basic system of global trade rules and dispute resolution.

Explanation

The World Trade Organization (WTO) came into existence in 1995, replacing the General Agreement on Tariff and Trade, which had regulated
international trade for most of the prior 50 years. The WTO is the only global organization that provides a formal framework for international
trade. It primarily seeks to reduce tariffs and nontariff barriers to trade by fostering global trade through the administration of bilateral and
multilateral trade agreements, along with related trade dispute resolution.

(Choice A) The World Bank Group's fundamental purpose is to assist in the economic development of emerging economies but not necessarily
through trade.

(Choice B) The International Monetary Fund is the organization that supports exchange rate stability to promote global growth and poverty
reduction.

Things to remember:
The World Trade Organization (WTO) is the only global organization that governs and regulates international trade. The WTO primarily seeks to
reduce tariffs and nontariff barriers to trade by fostering global trade through the administration of bilateral and multilateral trade agreements, along
with related trade dispute resolution.

Describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary
Fund, and the World Trade Organization
LOS

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10. Country Z's government recently nationalized the country's largest steel-producing companies and generously compensated those companies'
shareholders. This scenario best describes the use of a:

A. cooperative financial tool.

 B. noncooperative economic tool.

C. noncooperative national security tool.

Explanation

Geopolitical tools

Tool type Examples

Alliances (eg, NATO)

National security Armed conflict
Espionage

Multilateral trade agreements (eg, NAFTA)

Economic
Nationalization

Free exchange of currencies

Permitting foreign investments
Financial
Reducing access to local currency markets
Limiting foreign investments

Actors often use geopolitical tools to improve or strain relationships with other countries to achieve certain objectives. Generally, there are three
types of tools: national security, economic, and financial. The positive (ie, cooperative) use of these tools can improve capital, labor, and economic
flows across borders. In contrast, the negative (ie, noncooperative) use of such tools has the opposite effect and may heighten geopolitical risk
and worsen investment returns.

Governments can apply economic tools to impact the level of cooperation with others globally. One cooperative tool is a multilateral trade
agreement. For example, the North American Free Trade Agreement (NAFTA) was created to facilitate the cross-border exchange of goods and
services among Canada, the US, and Mexico.

In contrast, nationalization, which involves the state seizure of a private industry, is a noncooperative economic tool. For example, Britain's
government nationalized its steel industry in 1967 to preserve domestic jobs (later re-privatized in 1988).

(Choice A) Financial tools mainly pertain to the cross-border movement of currencies and the level of foreign investments.

(Choice C) National security tools typically involve alliances, armed conflict, or espionage.

Things to remember:
Geopolitical tools can be related to national security, economic, or financial strategies. Each category includes cooperative tools, such as
multilateral trade agreements that facilitate the cross-border exchange of goods and services among nations, and noncooperative tools, such as
nationalization, which involves the state seizure of a private industry.

Describe tools of geopolitics and their impact on regions and economies

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11. Which of the following actions by a country is most likely to increase geopolitical risk?

 A. Initiating export subsidies

B. Eliminating capital controls

C. Coordinating standardized rules

Explanation

Investors can evaluate geopolitical risk using a framework based on two questions:

How cooperative is a country toward strategic, economic, or cultural coordination?

How much is a country focused on economic nationalism versus globalization?

Changes to a country's position along the cooperation and globalization spectrums, especially a shift toward noncooperative or nationalistic
behavior, potentially increase geopolitical risk. Initiating export subsidies, which favor internal companies at the expense of foreign competitors,
constitutes a change toward noncooperative behavior that increases geopolitical risk.

(Choice B) Eliminating capital controls is a cooperative action that supports globalization and most likely leads to economic benefits and a
reduction in geopolitical risk.

(Choice C) Coordinating standardization rules is a cooperative action that most likely leads to increased economic coordination, benefits to trade
and capital flows, and a reduction in geopolitical risk.

Things to remember:
Investors can evaluate geopolitical risk using a framework that assesses a country's level of cooperation and its focus on globalization or
nationalism. Countries that move toward noncooperative or nationalistic behavior increase geopolitical risk.

Describe geopolitics and its relationship with globalization

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12. Regarding geopolitics, which of the following statements is correct?

A. Nationalization occurs mainly in nonvital economic sectors.

 B. Free exchange of currencies can leave countries vulnerable.

C. National security tools are used more when state actors cooperate.

Explanation

Geopolitical tools

Tool type Examples

Alliances (eg, NATO)

National security Armed conflict
Espionage

Multilateral trade agreements (eg, NAFTA)

Economic
Nationalization

Free exchange of currencies

Permitting foreign investments
Financial
Reducing access to local currency markets
Limiting foreign investments

Governments can use financial tools to strengthen (or weaken) their relationships with other countries.
Cooperative financial tools include:

allowing more free exchange of international currencies, and

encouraging foreign investments.

Noncooperative financial tools include:

restricting access to local currency markets, and

discouraging foreign investments.

Although the free exchange of currencies can benefit participant countries, it can also create vulnerabilities in the international financial
system. For instance, many countries openly borrow from and lend to each other in US dollars. This exposes participants to risk of a change in
US monetary policy that may impact the real value of the US dollar.

(Choice A) Nationalization is an economic tool that involves a government seizing control of a private sector. It is most common in sectors
perceived vital to economic security or competitiveness.

(Choice C) Governments typically cooperate with each other (eg, in treaty organizations such as NATO) to minimize the need to use national
security tools (eg, armed conflict).

Things to remember:
Cooperative financial tools include allowing more free exchange of international currencies and encouraging foreign investments. Noncooperative
financial tools include constraining access to local currency markets and limiting foreign investments. Although largely beneficial, cooperative
financial tools can also create vulnerabilities in the international financial system.

Describe tools of geopolitics and their impact on regions and economies

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13. For an investor with a long-term investment horizon, the most appropriate response to a new, high-velocity geopolitical risk is to adjust a
portfolio's:

A. sector allocation.

 B. tactical asset allocation.

C. strategic asset allocation.

Explanation

Framework for assessing geopolitical risks

Likelihood Probability that a geopolitical risk will occur

Velocity How quickly the risk will impact investment returns

Impact Size of impact and breadth of impact

Analysts evaluate geopolitical risks by assessing the:

likelihood that they will occur,

velocity of impact, and
size and nature of impact.

Velocity describes the speed of impact on investment returns. High-velocity risks have short-term impacts and create short-term market volatility
(eg, 1987 stock market crash). Investors may capitalize on such market dislocations via tactical asset allocations (ie, short-term shifts in asset
class composition of a portfolio).

(Choice A) Investors typically shift sector allocations in response to medium-velocity risks, which have medium-term impacts and may negatively
impact a company's operations and reduce cash flows, thereby reducing valuation (eg, a crop disease decimates potato harvests for more than
one season).

(Choice C) Changes to strategic asset allocation may be warranted by low-velocity risks that have major long-term impacts due to changes to
asset class returns and risks.

Things to remember:
Analysts evaluate geopolitical threats by assessing the likelihood of occurrence, velocity of impact, and size and nature of impact. Velocity
describes the speed of impact on investment returns. Investors respond to high-velocity risks by making short-term tactical asset allocations.
Investors generally respond to long-term risks by changing strategic asset allocation.

Describe tools of geopolitics and their impact on regions and economies

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