Deck 25: International Diversification

Question 1

The developed country with the lowest average local-currency equity-market excess return between 2002-2011 is

A)Greece.
B)Korea.
C)U.K.
D)U.S.

Answer 1

A

Question 2

The performance of an internationally diversified portfolio may be affected by

A)country selection.
B)currency selection.
C)stock selection.
D)All of the options
E)None of the options

Answer 2

D
Explanation: All of the factors may affect the performance of an international portfolio.

Question 3

The __________ equity market had the highest average U.S.dollar excess return between 2002-2011.

A)Russian
B)Finnish
C)Colombian
D)U.S.

Answer 3

C

Question 4

The developed country with the highest average U.S.dollar equity-market excess return between 2002-2011 is

A)Japan.
B)Norway.
C)Austria.
D)U.S.

Question 5

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

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

Question 6

The emerging market country with the highest average local-currency equity-market excess return between 2002-2011 is

A)China.
B)Colombia.
C)Poland.
D)Turkey.

Question 7

The developed country with the highest average local-currency equity-market excess return between 2002-2011 is

A)Japan.
B)Norway.
C)U.K.
D)U.S.

Question 8

The emerging market country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is

A)China.
B)Russia.
C)Poland.
D)Taiwan.

Question 9

The __________ equity market had the highest average U.S.dollar standard deviation of excess returns between 2002-2011.

A)Turkish
B)Finnish
C)Indonesian
D)U.S.

Question 10

The __________ equity market had the lowest average U.S.dollar excess return between 2002-2011.

A)Russian
B)Finnish
C)Colombian
D)Greece

Question 11

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

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

Question 12

__________ are mutual funds that invest in one country only.

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

Question 13

Over the period 2002-2011, most correlations between the U.S.stock index and stock-index portfolios of other countries were

A)negative.
B)positive but less than .9.
C)approximately zero.
D).9 or above.
E)None of the options

Question 14

The __________ equity market had the highest average local currency excess return between 2002-2011.

A)Colombian
B)Norwegian
C)U.K.
D)U.S.

Question 15

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

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

Question 16

The emerging market country with the lowest average local-currency equity-market excess return between 2002-2011 is

A)Taiwan.
B)Colombia.
C)Poland.
D)Turkey.

Question 17

The __________ equity market had the lowest average local currency excess return between 2002-2011.

A)Colombian
B)Greece
C)U.K.
D)U.S.

Question 18

The developed country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is

A)Japan.
B)Korea.
C)Austria.
D)Greece.

Question 19

The __________ equity market had the lowest average U.S.dollar standard deviation of excess returns between 2002-2011.

A)Turkish
B)U.S.
C)Indonesian
D)U.K.

Question 20

The emerging market country with the highest average U.S.dollar equity-market excess return between 2002-2011 is

A)China.
B)Colombia.
C)Poland.
D)Turkey.

Question 21

The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's country selection return contribution.

A)12.5%
B)-12.5%
C)11.25%
D)-1.25%
E)1.25%

Question 22

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

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

Question 23

The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's stock selection return contribution.

A)1.0%
B)-1.0%
C)3.0%
D)0.25%

Question 24

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

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
E)None of the options

Question 25

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

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

Question 26

The __________ equity market had the highest average local currency standard deviation of excess returns between 2002-2011.

A)Turkish
B)Argentina
C)Indonesian
D)U.S.

Question 27

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

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

Question 28

In 2011, the U.S.equity market represented __________ of the world equity market.

A)19%
B)60%
C)43%
D)36%

Question 29

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.

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

Question 30

Investors looking for effective international diversification should

A)invest about 60% of their money in foreign stocks.
B)invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market.
C)frequently hedge currency exposure.
D)invest about 60% of their money in foreign stocks and invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market.
E)None of the options

Question 31

The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's currency selection return contribution.

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

Question 32

You are a U.S.investor who purchased British securities for 2,000 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 2,400 pounds and the pound is worth $1.60.

A)16.7%
B)20.0%
C)28.0%
D)40.0%
E)None of the options

Question 33

International investing

A)cannot be measured against a passive benchmark, such as the S&P 500.
B)can be measured against a widely used index of non-U.S.stocks, the EAFE Index (Europe, Australia, Far East).
C)can be measured against international indexes.
D)can be measured against a widely used index of non-U.S.stocks, the EAFE Index (Europe, Australia, Far East) and against international indexes.
E)None of the options

Question 34

The yield on a 1-year bill in the U.K.is 8%, and the present exchange rate is 1 pound = U.S.$1.60.If you expect the exchange rate to be 1 pound = U.S.$1.50 a year from now, the return a U.S.investor can expect to earn by investing in U.K.bills is

A)-6.7%.
B)0%.
C)8%.
D)1.25%.
E)None of the options

Question 35

The interest rate on a 1-year Canadian security is 8%.The current exchange rate is C$ = US $0.78.The 1-year forward rate is C$ = US $0.76.The return (denominated in U.S.$) that a U.S.investor can earn by investing in the Canadian security is

A)3.59%.
B)4.00%.
C)5.23%.
D)8.46%.
E)None of the options

Question 36

Exchange rate risk

A)results from changes in the exchange rates between the currency of the investor and the country in which the investment is made.
B)can be hedged by using a forward or futures contract in foreign exchange.
C)cannot be eliminated.
D)results from changes in the exchange rates between the currency of the investor and the country in which the investment is made and cannot be eliminated.
E)results from changes in the exchange rates between the currency of the investor and the country in which the investment is made and can be hedged by using a forward or futures contract in foreign exchange.

Question 37

The __________ equity market had the lowest average local currency standard deviation of excess returns between 2002-2011.

A)Turkish
B)Finnish
C)Indonesian
D)Australia

Question 38

U.S.investors

A)can trade derivative securities based on prices in foreign security markets.
B)cannot trade foreign derivative securities.
C)can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K.and European stocks.
D)can trade derivative securities based on prices in foreign security markets and can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K.and European stocks.
E)None of the options

Question 39

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 investor indifferent between investing in the U.S.bill and the Canadian bill.

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

Question 40

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

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

Question 41

You are managing a portfolio that consists of U.S.equities.You have prepared a presentation to use when you discuss the possibility of adding international stocks to your client's portfolio.
- Draw a graph that shows the risk of the portfolio relative to the number of stocks held in the portfolio.
- When your client arrives, he is surprised at your suggestion that he add international stocks, but is willing to listen to your statements to justify your recommendations.State two reasons why he should consider the international stocks and briefly explain each.

Question 42

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

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 40% of world equities.
E)is inappropriate because the average U.S.investor has less than 20% of her portfolio in non-U.S.equities.

Question 43

Discuss some of the factors that might be included in a multifactor model of security returns in an international application of arbitrage pricing theory (APT).

Question 44

The EAFE is

A)the East Asia Foreign Equity index.
B)the Economic Advisor's Foreign Estimator index.
C)the European and Asian Foreign Equity index.
D)the European, Asian, French Equity index.
E)the European, Australian, Far East index.

Question 45

Which of the following countries has an equity index that lies on the efficient frontier generated by allowing international diversification

A)The United States
B)The United Kingdom
C)Japan
D)Norway
E)None of the options-each of these countries' indexes fall inside the efficient frontier.

Question 46

WEBS portfolios

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.

Question 47

Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.

Question 48

Home bias refers to

A)the tendency to vacation in your home country instead of traveling abroad.
B)the tendency to believe that your home country is better than other countries.
C)the tendency to give preferential treatment to people from your home country.
D)the tendency to overweight investments in your home country.
E)None of the options

Question 49

When an investor adds international stocks to her U.S.stock portfolio

A)it will raise her risk relative to the risk she would face just holding U.S.stocks.
B)she can reduce the risk of her portfolio.
C)she will increase her expected return, but must also take on more risk.
D)it will have no impact on either the risk or the return of her portfolio.
E)she needs to seek professional management because she doesn't have access to international investments on her own.

Question 50

Marla holds her portfolio 100% in U.S.securities.She tells you that she believes foreign investing can be extremely hazardous to her portfolio.She's not sure about the details, but has "heard some things." Discuss this idea with Marla by listing three objections you have heard from your clients who have similar fears.Explain each of the objections is subject to faulty reasoning.

Question 51

"ADRs" stands for ___________ and "WEBS" stands for ____________.

A)additional dollar returns; weekly equity and bond survey
B)additional daily returns; world equity and bond survey
C)American dollar returns; world equity and bond statistics
D)American depository receipts; world equity benchmark shares
E)adjusted dollar returns; weighted equity benchmark shares

Question 52

The average country equity market share is

A)less than 2%.
B)between 3% and 4%.
C)between 5% and 7%.
D)between 7% and 8%.
E)greater than 8%.