Question 1

The stock market of country A has an expected return of 5%, and standard deviation of expected return of 8%. The stock market of country B has an expected return of 15% and standard deviation of expected return of 10%.
Find the expected return of a portfolio with half invested in A and half invested in B.

Accepted Answer

The answer of The stock market of country A has...

Question 2

Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests that

Accepted Answer

A) investors should liquidate their portfolio holdings during turbulent periods. 
B) since investors need risk diversification most precisely when markets are turbulent, there may be less benefit to international diversification for investors who liquidate their portfolio holdings during turbulent periods. 
C) this kind of correlation is why international portfolio diversification is smart for today's investor. 
D) none of the above

Question 3

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a $50 American stock using 50% margin. One year after investment, the stock pays a $1 dividend, and sells for $54 the exchange has changed from €.625 per dollar to €.6875 per dollar. The interest on the margin loan is 1% per year. The margin loan was denominated in dollars.

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Question 4

Emerald Energy is an oil exploration and production company that trades on the London stock market. Assume that when purchased by an international investor the stock's price and the exchange rate were £5 and £0.64/$1.00 respectively. At selling time, one year after purchase, they were £6 and £0.60/$1.00. If the investor had sold £5, the principal investment amount at the same time that the stock was purchased, forward at the forward exchange rate of £0.60/$1.00. The dollar rate of return would be:

Accepted Answer

A) 0.26% 
B) 26.00% 
C) 28.00% 
D) 30.00%

Question 5

Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels: (i) - the volatility of the investment due to the volatility of the exchange rate
(ii) - the contribution of the cross-product term
(iii) - its covariance with the local market returns
Which of the following contributes and accounts for most of the volatility?

Accepted Answer

A) (i) and (ii) 
B) (ii) and (iii) 
C) (i) and (iii) 
D) only (ii)

Question 6

Explanations for Home Bias include

Accepted Answer

A) domestic securities may provide investors with certain extra services, such as hedging against domestic inflation, that foreign securities do not. 
B) there may be barriers, for or informal, to investing in foreign securities. 
C) investors may face country-specific inflation in violation of PPP. 
D) all of the above

Question 7

Advantages of investing in U.S.-based international mutual funds include

Accepted Answer

A) lower transactions costs relative to direct investing. 
B) circumvention of many legal and institution barriers to direct portfolio investment in many foreign markets. 
C) professional management, potentially expertise in security selection, definitely record-keeping. 
D) all of the above

Question 8

Hedge funds

Accepted Answer

A) do not register as an investment company and are not subject to reporting or disclosure requirements. 
B) have experienced phenomenal growth in recent years. 
C) tend to have relatively low correlations with various stock market benchmarks. 
D) all of the above

Question 9

The stock market of country A has an expected return of 5%, and standard deviation of expected return of 8%. The stock market of country B has an expected return of 15% and standard deviation of expected return of 10%.
Assume that the correlation of expected return between A and B is negative 1. Calculate the standard deviation of expected return of the portfolio in the last question.

Accepted Answer

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Question 10

The mean and standard deviation (SD) of monthly returns, over a given period of time, for the stock markets of two countries, X and Y are  Assuming that the monthly risk-free interest rate is 0.25%, the Sharpe performance measures, SHP(X) and SHP(Y), and the performance ranks, respectively, for X and Y are:

Accepted Answer

A) SHP(X) = 0.271, rank = 1, and SHP(Y) = 0.219, rank = 2 
B) SHP(X) = 0.271, rank = 2, and SHP(Y) = 0.219, rank = 1 
C) SHP(X) = 18.84, rank = 1, and SHP(Y) = 23.04, rank = 2 
D) SHP(X) = 23.04, rank = 2, and SHP(Y) = 18.84, rank = 1

Question 11

Emerald Energy is an oil exploration and production company that trades on the London stock market. Assume that when purchased by an international investor the stock's price and the exchange rate were £5 and £0.64/$1.00 respectively. At selling time, one year after the purchase date, they were £6 and £0.60/$1.00. Calculate the investor's annual percentage rate of return in terms of the U.S. dollars.

Accepted Answer

A) 0.20% 
B) 20.00% 
C) 1.28% 
D) 28.00%

Question 12

The less correlated the securities in a portfolio,

Accepted Answer

A) the lower the portfolio risk. 
B) the higher the portfolio risk. 
C) the lower the unsystematic risk. 
D) the higher the diversifiable risk.

Question 13

If the investor hedges the exchange rate risk when investing internationally

Accepted Answer

A) the risk-return efficiency is likely to be superior. 
B) the expected return to the U.S. dollar investor is approximately the same whether the investor hedges the exchange rate risk in the investment, or remains unhedged. 
C) to the extent that the investor establishes an effective hedge to eliminate exchange rate uncertainty, the risk will be reduced. 
D) all of the above

Question 14

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. The stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54.
Spot exchange rates at the start and end of the year are shown in the table.

Accepted Answer

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Question 15

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £8,800 forward at the forward rate of €1.28 per pound.
Spot exchange rates at the start and end of the year are shown in the table.

Accepted Answer

The answer of Calculate the euro-based return an Italian investor...

Question 16

The stock market of country A has an expected return of 8%, and standard deviation of expected return of 5%. The stock market of country B has an expected return of 16% and standard deviation of expected return of 10%.
Assume that the correlation of expected return between A and B is negative 1. Calculate the standard deviation of expected return of the portfolio in the last question.

Accepted Answer

The answer of The stock market of country A has...

Question 17

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock on margin with only 40% down and 60% borrowed.The stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per pound. The interest on the margin loan is 1% per year. The margin loan is denominated in pounds.

Accepted Answer

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Question 18

Compared with bond markets

Accepted Answer

A) the risk of investing in foreign stock markets is, to a lesser degree, attributable to exchange rate uncertainty. 
B) the risk of investing in foreign stock markets is, to a much greater degree, attributable to exchange rate uncertainty. 
C) exchange risk is lower than default risk and interest rate risk. 
D) all of the above

Question 19

Assume that you have invested $100,000 in British equities. When purchased, the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively. At selling time, one year after purchase, they were £60 and £0.60/$1.00. If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00. The dollar rate of return would be:

Accepted Answer

A) 10.90% 
B) 7.58% 
C) 28.00% 
D) 9.09%

Question 20

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock using 50% margin. One year after investment, the stock pays a £1 dividend, and sells for £54. The interest on the margin loan is 1% per year. The margin loan was denominated in pounds.
Spot exchange rates at the start and end of the year are shown in the table.

Accepted Answer

The answer of Calculate the euro-based return an Italian investor...

Exam 15: International Portfolio Investment

Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests that

Explanations for Home Bias include

Advantages of investing in U.S.-based international mutual funds include

Hedge funds

The less correlated the securities in a portfolio,

If the investor hedges the exchange rate risk when investing internationally

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. The stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54. Spot exchange rates at the start and end of the year are shown in the table.

Compared with bond markets