EXCHANGE RATE EXPOSURE AND STOCK BETAS

In this paper, I examine the impact of foreign exposure of a company on the systematic and total risk of a company. The systematic risk of a company is measured as the sensitivity of the company[s stock with respect to the home-country market (in this paper, the U.S. market) and total risk is measured as the standard deviation of the return on the stock. If the beta of a company's foreign operations with respect to the foreign market is high and/or the foreign market has high correlation with the U.S. market and/or the foreign market has high volatility relative to the U.S. market, the systematic and total risk of a company with foreign market operations may, theoretically at least, be higher than an identical company with no foreign operations. The existence and extent of risk reduction due to the presence of foreign operations is, therefore, an empirical question. In this study, I examine these issues empirically. My results indicate that foreign market exposure did not Lead to significant decreases in beta over the period 1973-97.