Diversified Investments Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and subject to a low degree of exchange rate risk? Explain.

Here is a tip:
A diversified investment is a holding of short term and long term assets that earns the maximum return with minimum risk.

Explanation
A multinational company is not certain about the changes of the exchange rate in the future. It may choose to diversify its cash deposits denominated in different currencies.

The exposure of a multinational company to exchange rate risk will reduce if the percentage of excess cash invested in each foreign currency is limited.

Risk of the currency depreciation is substantially high if the funds are invested in a single foreign currency as compared to the substantial deprecation of currencies in a portfolio.

Verified Answer
The portfolio of investment is denominated in euros, o the short term investments are not well diversified.

The return on all the short term securities denominated in euros will decline from the overview of the Country U firm if the euro weakens against the dollar.