Statement #1 is correct. When a country’s financial markets are liberalized, stock returns generally increase as investors bid up the prices of equities previously unavailable to them. After liberalization, stock returns subsequently decline, perhaps due to the previously high liberalization returns.
Statement #2 is incorrect. It is true that liberalization leads to higher correlations and betas with world markets. However, the empirical evidence demonstrates that liberalization does not affect the volatility of returns in the short run
