Deck 11: International Portfolio Investment

Question 1

Calculate the investor's annual percentage rate of return in Canadian dollars.(Round final percentage answer to 2 decimal places,and do not round intermediate calculations.)

A) -13.14%
B) -3.19%
C) 3.19%
D) 13.14%

Answer 1

A
Explanation: Purchase price in Canadian dollars = C$10/C$0.64 = C$15.625Selling price in Canadian dollars = C$9.5/C$0.7 = C$13.571Therefore, the Canadian dollar rate of return is:R(C$) = [(C$13.571 - C$15.625)/C$15.625] × 100% = -13.14%

Question 2

The home bias effect is the investors' disproportionate investment in:

A) any Residential and commercial real estate.
B) real estate in which the assessed value of the building is higher than the assessed value of the land.
C) real estate in which the ratio of the assessed value of the building to the assessed value of the land is higher than the average in the same jurisdiction.
D) None of these.

Answer 2

D

Question 3

To evaluate the gains from holding international portfolios over purely domestic portfolios we can use:

A) the increase in the Sharpe performance measure.
B) the increase in the portfolio return.
C) Both the increase in the sharpe performance measure and the increase in the portfolio return.
D) cannot be evaluated

Answer 3

C

Question 4

Which of the following characterizes international investor behaviour?

A) Investors are fully diversified.
B) Investors hold optimal international portfolios.
C) Investors show a home bias in their portfolio holdings.
D) Investors don't invest in international stocks.

Question 5

Which of the following statements is true about the OIP?

A) It has lower variance then ODP.
B) It has higher expected return then ODP.
C) It is the same for all investors regardless their country of residence.
D) None of these.

Question 6

Calculate the investor's annual percentage rate of return in terms of the U.S.dollars. (Do not round intermediate calculations.)

A) 0.20%
B) 20.00%
C) 0.28%
D) 28.00%

Question 7

Calculate the investor's annual percentage rate of return in terms of the U.S.dollars.

A) -5.26%
B) -5%
C) 5%
D) 5.26%

Question 8

Gains from portfolio diversification are largest when:

A) the securities are perfectly positively correlated.
B) the securities are not correlated.
C) the securities are perfectly negatively correlated.
D) Need more information.

Question 9

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: (Do not round intermediate calculations.)

A) 0.26%.
B) 34.67%.
C) 28.00%.
D) 30.00%.

Question 10

Which of the following is not a potential explanation for the home bias in portfolio holdings?

A) Domestic portfolios allow for hedging inflation risk.
B) Legal and institutional restrictions.
C) Taxes and transaction/information costs.
D) Higher rate of return on domestic stocks.

Question 11

In the context of investments in securities (stocks and bonds),portfolio risk diversification refers to:

A) the time-honored adage "Don't put all your eggs in one basket".
B) investors' ability to reduce portfolio risk by holding securities that are less than perfectly positively correlated.
C) the fact that the less correlated the securities in a portfolio, the lower the portfolio risk.
D) All of these.

Question 12

Investors can use of the following to diversify their portfolios internationally except:

A) International mutual funds
B) ADRs
C) WEBS
D) STAS

Question 13

Exchange rate fluctuations contribute to the risk of foreign investment through the following 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?

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

Question 14

In May 1995 when the exchange rate was 80 yen per dollar,Japan Life Insurance Company invested ¥800,000,000 in pure-discount U.S.bonds.The investment was liquidated one year later when the exchange rate was 110 yen per dollar.If the rate of return earned on this investment was 46% in terms of yen,calculate the dollar amount that the bonds were sold at:(Round your final answer to nearest thousand dollar)

A) $10,618,000.
B) $10,720,000.
C) $14,600,000.
D) None of these.

Question 15

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: $$\begin{array} { c c c } \text { Country } & \begin{array} { l } \text { Mean } \\( \% )\end{array} & \begin{array} { c } \text { SD } \\( \% )\end{array} \\\hline \text { X } & 1.57 & 4.87 \\\text { Y } & 1.92 & 7.64\end{array}$$ 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: (Don't round intermediate calculations and Round your final answers to 3 decimal places.)

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 16

Calculate the exchange rate return from a Canadian perspective.(Round final percentage answer to 2 decimal places,and do not round intermediate calculations.)

A) -9.38
B) -8.57%
C) 8.57%
D) 9.38

Question 17

In abbreviation ADR,letter D stands for:

A) Depreciation.
B) Devaluation.
C) Denomination.
D) None of these.

Question 18

The "Sharpe performance measure" (SHP)is:

A) a "market-adjusted" performance measure.
B) the excess return (above and beyond the risk-free interest rate) per standard deviation risk.
C) the sensitivity level of a national market to world market movements.
D) the total return per standard deviation risk.

Question 19

Which of the following is NOT true about WEBS?

A) They are, in essence, international mutual funds.
B) They are traded on the exchange.
C) They track indices of individual countries.
D) Legally they are private investment partnerships.

Question 20

The realized dollar returns for a U.S.resident investing in a foreign market will depend on the return in the foreign market as well as on the exchange rate fluctuations between the dollar and the foreign currency. Calculate the variance of the monthly rate of return in dollar terms,if the variance of the foreign market's return (in terms of its own currency)is 1.14,the variance between the U.S.dollar and the foreign currency is 17.64,the covariance is 2.34,and the contribution of the cross-product term is 0.04.(Do not round intermediate calculations)

A) 21.16
B) 23.50
C) 26.89
D) 28.65

Question 21

Which of the following statements is true?

A) Investors have a foreign bias in portfolio holdings.
B) Investors have a home bias in portfolio holdings.
C) International investors prefers optimal international portfolio.
D) The foreign bias in portfolio holdings is consistent with portfolio theory.

Question 22

A Canadian investor buys shares in DaimlerChrysler on the New York Stock Exchange when the stock's price and the exchange rate were US$40 and US$0.70/C$ respectively.One year later the investor sells the shares for US$41 and the exchange rate is US$0.80/$.
a)Calculate the investor's annual percentage rate of return in terms of the U.S.dollars.
b)Calculate the investor's annual percentage rate of return in Canadian dollars.

Question 23

A US investor bought shares in ABC Inc.on the Frankfurt Stock Exchange 2 years ago for EUR 10,000.The exchange rate at that time was EUR 1.20/USD.Currently,the shares are worth EUR 11,000 and the exchange rate is EUR 0.80/$.The investor had sold EUR 10,000 (the principal investment amount at the same time that the stock was purchased)forward at the forward exchange rate of EUR 1.15/$.What is the dollar rate of return?
Assume that the unhedged portion of the investment is exchanged at the current exchange rate.

Question 24

In May 2003 when the exchange rate was Yen 110/$,Nissan Motor Company invested ¥1,100,000,000 in pure-discount U.S.bonds and liquidated the investment one year later when the exchange rate was Yen 105/$.The Yen rate of return earned on this investment was 10%.
a)Calculate the dollar amount that the bonds were sold at.
b)Calculate the dollar rate of return of this investment.

Question 25

A Canadian investor holds the British market portfolio.Calculate the variance of the monthly rate of return in Canadian dollar terms,if the variance of the British market return is 2,the variance between the U.S.dollar and the foreign currency is 20,the covariance is -2.34,and the contribution of the cross-product term is 0.06.

A) -17.38
B) -14.48
C) 14.48
D) 17.38

Question 26

A US investor bought shares in ABC Inc.on the Frankfurt Stock Exchange 2 years ago for EUR 10,000.The exchange rate at that time was EUR 1.20/USD.Currently,the shares are worth EUR 11,000 and the exchange rate is EUR 0.80/$.Calculate the investor's annual percentage rate of return in terms of the U.S.dollars.

Question 27

If the investor had sold US$5,half of the principal investment amount at the same time that the stock was purchased,forward at the forward exchange rate of US$0.64/C$1.00,the dollar rate of return would be: (Round final percentage answer to 2 decimal places,and do not round intermediate calculations.)

A) -13.14%
B) -8.86%
C) -5.00%
D) 8.86%