Deck 7: International Investment and Diversification

Question 1

In the U.S., a typical allocation to international stocks would be

A) 1-2%
B) 5-7%
C) 10-20%
D) 30-50%

Answer 1

10-20%

Question 2

U.S. equities represent about _________ of the world's equity capitalization.

A) 8%
B) 17%
C) 51%
D) 83%

Answer 2

51%

Question 3

When the Evans and Archer study is repeated with a security universe that includes international securities, the level of systematic risk

A) increases
B) decreases
C) remains unchanged
D) there is no relation between systematic risk and the Evans and Archer study

Answer 3

decreases

Question 4

For a portfolio with only U. S. securities, market risk accounts for about ___ of a security's total risk.

A) 5%
B) 17%
C) 27%
D) 54%

Question 5

A study by Solnik indicates that systematic risk could be reduced to about ______ for a portfolio including both U.S. and international stocks.

A) 6.2%
B) 11.7%
C) 19.6%
D) 27.1%

Question 6

The correlation among securities on European exchanges is generally

A) decreasing
B) increasing
C) remaining unchanged
D) cannot be determined

Question 7

According to a study by Bruno Solnik, what percentage of total risk can be diversified away by holding international securities?

A) One half
B) Five eighths
C) Three fourths
D) Seven eighths

Question 8

Globally, the number of equity securities is about

A) 100,000
B) 250,000
C) 1 million
D) 100 million

Question 9

The changing relationships among currencies of interest to you constitute ______ risk.

A) foreign exchange
B) political
C) social
D) international

Question 10

If something costs NZ$110 and the exchange rate between the New Zealand dollar and the U. S. dollar is $0.5855/NZ$, what is the cost in U. S. dollars?

A) $58.55
B) $64.41
C) $110.00
D) $187.88

Question 11

Suppose someone holds a security denominated in Australian dollars. If the Australian value of the security does not change but the U. S. dollar depreciates relative to the Australian dollar, the security holder has a

A) paper loss
B) paper gain
C) realized gain
D) realized loss

Question 12

An investor purchased a security for ¥10,000 when the exchange rate was ¥750/$. He later sold the security for ¥12,000 and the exchange rate had changed to ¥850/$. What was the holding period return from a US investor's perspective?

A) -5.9%
B) -2.3%
C) 2.3%
D) 5.9%

Question 13

An investor's exchange rate "frame of reference" is called the

A) currency of account
B) exchange rate
C) nominal rate
D) international standard

Question 14

The nominal rate of interest is a function of all of the following EXCEPT

A) real rate
B) inflation rate
C) risk premium
D) prime rate

Question 15

The current price of a foreign currency is the ___ rate.

A) forward
B) futures
C) spot
D) delivery

Question 16

The contractual rate between a bank and a client for the future delivery of foreign exchange is the ___ rate.

A) forward
B) futures
C) spot
D) delivery

Question 17

A U. S. storekeeper who entered into an obligation to pay Swiss francs for a delivery of goods could hedge the foreign exchange risk by

A) entering into a forward contract to buy Swiss francs
B) entering into a forward contract to deliver Swiss francs
C) buying a foreign currency which is negatively correlated with the Swiss franc
D) buying a foreign currency which is positively correlated with the Swiss franc

Question 18

Forward rates reflect differences in

A) national interest rates
B) risk premiums
C) the time value of money
D) tax treatment

Question 19

Inflation in the home country causes the value of the home currency to ____ in the global market.

A) appreciate
B) depreciate
C) fluctuate
D) change

Question 20

The text described an example of purchasing power parity using

A) automobiles
B) bottles of wine
C) airline tickets
D) Big Mac hamburgers

Question 21

The extent to which you face foreign exchange risk is

A) nominal risk
B) exposure
C) political risk
D) arbitrage risk

Question 22

A foreign currency exchange forward contract priced at a discount means the

A) forward rate is larger than the spot rate
B) spot rate is larger than the forward rate
C) forward rate minus the risk premium is negative
D) spot rate minus the risk premium is negative

Question 23

The type of foreign exchange risk exposure that a portfolio manager is most concerned with is

A) economic exposure
B) translation exposure
C) transaction exposure
D) accounting exposure