Question 1

The major concern that has been raised with respect to the weighting of countries within the EAFE index is

Accepted Answer

A)  currency volatilities are not considered in the weighting. 
B)  cross-correlations are not considered in the weighting. 
C)  inflation is not represented in the weighting. 
D)  the weights are not proportional to the asset bases of the respective countries. 
E)  None of the options are correct. 
A)  currency volatilities are not considered in the weighting. 
B)  cross-correlations are not considered in the weighting. 
C)  inflation is not represented in the weighting. 
D)  the weights are not proportional to the asset bases of the respective countries. 
E)  None of the options are correct. D

Question 2

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be

Accepted Answer

A)  12.53%. 
B)  15.21%. 
C)  17.50%. 
D)  18.75%. 
A)  12.53%. 
B)  15.21%. 
C)  17.50%. 
D)  18.75%. B

Question 3

WEBS portfolios

Accepted Answer

A)  are passively managed. 
B)  are shares that can be sold by investors. 
C)  are free from brokerage commissions. 
D)  are passively managed and are shares that can be sold by investors. 
E)  All of the options are correct. 
A)  are passively managed. 
B)  are shares that can be sold by investors. 
C)  are free from brokerage commissions. 
D)  are passively managed and are shares that can be sold by investors. 
E)  All of the options are correct. D

Question 4

The __________ index is a widely used index of non-U.S. stocks.

Accepted Answer

A)  CBOE 
B)  Dow Jones 
C)  EAFE 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  CBOE 
B)  Dow Jones 
C)  EAFE 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 5

Using local currency returns, the S&P 500 has the highest correlation with

Accepted Answer

A)  Euronext. 
B)  FTSE. 
C)  Nikkei. 
D)  Toronto. 
A)  Euronext. 
B)  FTSE. 
C)  Nikkei. 
D)  Toronto.

Question 6

Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

Accepted Answer

A)  1.6037 
B)  2.0411 
C)  1.7500 
D)  2.3369 
A)  1.6037 
B)  2.0411 
C)  1.7500 
D)  2.3369

Question 7

The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.76. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make an investor indifferent between investing in the U.S. bill and the Canadian bill.

Accepted Answer

A)  2.4% 
B)  1.3% 
C)  6.4% 
D)  6.7% 
E)  None of the options are correct. 
A)  2.4% 
B)  1.3% 
C)  6.4% 
D)  6.7% 
E)  None of the options are correct.

Question 8

The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: $\begin{array}{c}
\begin{array}{lll}
 \text {  } \
 \text {  } \
 \text {  } \
 \text { Eur } \
 \text {Aus  } \
 \text {FE  } \
\end{array}
\begin{array}{c}
 \text {  } \
 \text {  } \
 \text {  EAFE Welght } \
 \text { 0.30 } \
 \text {  0.10} \
 \text {  0.60} \
\end{array}
\begin{array}{c}
 \text {  } \
 \text { Return on  } \
 \text {Equity Index  } \
10\%\
5\%\
15\%
\end{array}
\begin{array}{c}
 \text {Currency  } \
 \text {Aplication  } \
  E_{1} / E_{0.1} \
10\%\
-10\%\
30\%
\end{array}
\begin{array}{c}
 \text {  } \
 \text { Quantitative's } \
 \text {  Welght} \
0.25\
0.25\
0.50
\end{array}
\begin{array}{c}
 \text {  } \
 \text {  } \
 \text {Manager's Return  } \
9\%\
8\%\
16\%
\end{array}
\end{array}$
 Calculate Quantitative's currency selection return contribution.

Accepted Answer

A)  +20% 
B)  5% 
C)  +15% 
D)  +5% 
E)  10% 
A)  +20% 
B)  5% 
C)  +15% 
D)  +5% 
E)  10%

Question 9

You are a U.S. investor who purchased British securities for 4,000 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,400 pounds and the pound is worth $1.62.

Accepted Answer

A)  16.7% 
B)  18.8% 
C)  28.0% 
D)  40.0% 
E)  None of the options 
A)  16.7% 
B)  18.8% 
C)  28.0% 
D)  40.0% 
E)  None of the options

Question 10

__________ are mutual funds that invest in one country only.

Accepted Answer

A)  ADRs 
B)  ECUs 
C)  Single-country funds 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  ADRs 
B)  ECUs 
C)  Single-country funds 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 11

The straightforward generalization of the simple CAPM to international stocks is problematic because

Accepted Answer

A)  inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ. 
B)  investors in different countries view exchange-rate risk from the perspective of different domestic currencies. 
C)  taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ. 
B)  investors in different countries view exchange-rate risk from the perspective of different domestic currencies. 
C)  taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 12

Shares of several foreign firms are traded in the U.S. markets in the form of

Accepted Answer

A)  ADRs. 
B)  ECUs. 
C)  single-country funds. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  ADRs. 
B)  ECUs. 
C)  single-country funds. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 13

Suppose the 1-year risk-free rate of return in the U.S. is 6%. The current exchange rate is 1 pound = U.S. $1.62. The 1-year forward rate is 1 pound = $1.53. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

Accepted Answer

A)  15.44% 
B)  13.50% 
C)  12.24% 
D)  7.62% 
E)  None of the options 
A)  15.44% 
B)  13.50% 
C)  12.24% 
D)  7.62% 
E)  None of the options

Question 14

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be

Accepted Answer

A)  12.0%. 
B)  12.5%. 
C)  13.0%. 
D)  15.5%. 
A)  12.0%. 
B)  12.5%. 
C)  13.0%. 
D)  15.5%.

Question 15

Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

Accepted Answer

A)  2.44% 
B)  2.50% 
C)  7.00% 
D)  7.62% 
E)  None of the options are correct. 
A)  2.44% 
B)  2.50% 
C)  7.00% 
D)  7.62% 
E)  None of the options are correct.

Question 16

According to PRS, in 2015, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky)?

Accepted Answer

A)  Switzerland 
B)  Canada 
C)  Germany 
D)  U.S. 
A)  Switzerland 
B)  Canada 
C)  Germany 
D)  U.S.

Question 17

You are a U.S. investor who purchased British securities for 2,200 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 2,560 pounds and the pound is worth $1.60.

Accepted Answer

A)  16.7% 
B)  20.3% 
C)  24.1% 
D)  41.4% 
E)  None of the options 
A)  16.7% 
B)  20.3% 
C)  24.1% 
D)  41.4% 
E)  None of the options

Question 18

__________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.

Accepted Answer

A)  Default risk 
B)  Foreign exchange risk 
C)  Market risk 
D)  Political risk 
E)  None of the options are correct. 
A)  Default risk 
B)  Foreign exchange risk 
C)  Market risk 
D)  Political risk 
E)  None of the options are correct.

Question 19

Suppose the 1-year risk-free rate of return in the U.S. is 4% and the 1-year risk-free rate of return in Britain is 6%. The current exchange rate is 1 pound = U.S. $1.67. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

Accepted Answer

A)  1.6385 
B)  2.0411 
C)  1.7500 
D)  2.3369 
A)  1.6385 
B)  2.0411 
C)  1.7500 
D)  2.3369

Question 20

Using the S&P 500 portfolio as a proxy of the market portfolio

Accepted Answer

A)  is appropriate because U.S. securities represent more than 60% of world equities. 
B)  is appropriate because most U.S. investors are primarily interested in U.S. securities. 
C)  is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S. securities. 
D)  is inappropriate because U.S. securities make up less than 41% of world equities. 
E)  is inappropriate because the average U.S. investor has less than 20% of his or her portfolio in non-U.S. equities. 
A)  is appropriate because U.S. securities represent more than 60% of world equities. 
B)  is appropriate because most U.S. investors are primarily interested in U.S. securities. 
C)  is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S. securities. 
D)  is inappropriate because U.S. securities make up less than 41% of world equities. 
E)  is inappropriate because the average U.S. investor has less than 20% of his or her portfolio in non-U.S. equities.

Exam 25: International Diversification

The major concern that has been raised with respect to the weighting of countries within the EAFE index is

WEBS portfolios

The __________ index is a widely used index of non-U.S. stocks.

Using local currency returns, the S&P 500 has the highest correlation with

The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.76. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make an investor indifferent between investing in the U.S. bill and the Canadian bill.

__________ are mutual funds that invest in one country only.

The straightforward generalization of the simple CAPM to international stocks is problematic because

Shares of several foreign firms are traded in the U.S. markets in the form of

Suppose the 1-year risk-free rate of return in the U.S. is 6%. The current exchange rate is 1 pound = U.S. $1.62. The 1-year forward rate is 1 pound = $1.53. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

According to PRS, in 2015, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky)?

__________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.

Using the S&P 500 portfolio as a proxy of the market portfolio

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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