Deck 19: International Securities Markets

Question 1

Most major foreign firms listed on the New York Stock Exchange such as Daimler/Chrysler trade their stocks directly on the NYSE rather than use ADRs.

Answer 1

False

Question 2

To some extent,in recent years Japan demonstrates that stock market growth is related to economic growth.

Answer 2

False

Question 3

American Depository Receipts allow foreign stocks to be traded in the United States markets very similarly to U.S.stocks.

Answer 3

True

Question 4

International diversification will provide low risk when the investor finds international securities having a compound rate of return equal to that of the United States and a correlation coefficient close to that of the United States portfolio.

Question 5

If the emerging markets were taken as a group at the end of 2005,their total market capitalization would rank them second behind the United States.

Question 6

Less developed countries may provide even greater risk reduction in a portfolio than developed countries.

Question 7

By combining foreign securities with domestic securities,investors increase their portfolio risk because foreign securities are more volatile than United States securities.

Question 8

U.S.multinational corporations are highly correlated with United States financial markets and therefore do not reduce portfolio risk to the same extent as investing in foreign corporations

Question 9

One of the biggest risks when investing in a foreign security market,is the risk of currency exchange fluctuations.

Question 10

The main advantage of international investment is that foreign markets may be negatively correlated with United States and other foreign markets.

Question 11

In the developing world,Germany has the second largest equity market after the United States.

Question 12

At the peak of the stock market bubble in 1999,the value of the developed world's stock market was $33 trillion.By 2002 the value had declined to less than $21 trillion.By year-end 2005 after several years of world-wide economic growth,the developed markets reached $36.5 trillion.

Question 13

Due to the less risk exposure through effective international portfolio diversification,yield tends to be somewhat lower than on portfolios composed entirely of United States securities.

Question 14

The United States equity markets accounted for over 50 percent of the value of World equity market at the end of 2005.

Question 15

Political risk can best be effectively reduced or eliminated by investing only in companies of European countries.

Question 16

The Securities Exchange Commission does not allow mutual funds to own foreign securities in their portfolios.

Question 17

Information on publicly traded foreign securities is not as regulated or as available as it is on United States securities.

Question 18

Foreign exchange risk is not a major concern to international investors because there have been fewer wide swings in currency values in recent years.

Question 19

As a general rule,transaction costs are lower in foreign markets than in the United States.

Question 20

Countries are divided into developed and emerging markets based on the market capitalization of their stock market.

Question 21

ADR's (American Depository Receipts)represent an ownership interest in a foreign company's common stock.

Question 22

Generally,foreign markets are more liquid and efficient than U.S.capital markets.

Question 23

The currency crisis in South Asia caused a big decrease in the value of South Asian countries' market values between 1996 and 2002.

Question 24

Investing in an international mutual fund does not help the investor avoid the administrative problems one would encounter if investing directly in foreign securities.

Question 25

The correlation coefficient measures the movement of one series of data to another series of data over the same time period.

Question 26

Since the beginning of the 1990s,we have seen major growth in "emerging" markets such as Chile,Mexico,Poland,and the Czech Republic.

Question 27

The European,Australian and Far East Index published by Morgan Stanley Capital Market International has returns over time that have been about 80 percent correlated with the Standard and Poor's 500.

Question 28

At the end of 2005,North America,Asia Pacific and Europe each accounted for one-third of the world's markets capitalization.

Question 29

Correlations of foreign stock market movements to U.S.stock market movements show that the period from 1997 to 2002 had the higher correlations than in the past.

Question 30

The market capitalization of General Electric,Microsoft,and Exxon combined,would rank ahead of any emerging market's capitalization,including China.

Question 31

One possible way of achieving international diversification in a portfolio is to invest in foreign firms which trade on United States markets or through ADRs.

Question 32

Russia,China and Korea have had the biggest increase in market capitalization of all the emerging market countries.

Question 33

Currency fluctuations and rates of return are the only really important things to consider when investing internationally.

Question 34

The data show that several markets such as the United States and Britain continually outperform the other developed markets such as Canada,Switzerland,and Japan.

Question 35

An "emerging market" is defined as a market where the country has a small capital market relative to the industrialized world.

Question 36

Even though Korea and China have markets bigger than some markets in developed countries,they are considered to be emerging markets because they have low per-capita gross domestic product.

Question 37

Emerging markets often have market structure similar to those in the developed world and trade their securities in a continuous auction market.

Question 38

The best possible way of achieving international diversification is to invest in United States companies having a large share of their business coming from foreign investment.

Question 39

Emerging markets seem to have fairly consistent valuation standards and ratios.

Question 40

Risk exposure to foreign currency changes can be hedged through foreign exchange contracts or foreign currency options.

Question 41

An investment in Mexico produces a return of 80 percent.However,the Mexican peso has just declined by 45 percent relative to the dollar.The previous value of the peso was $.0066.The adjusted return on the investment is

A)42 percent gain
B)8.5 percent loss
C)1.0 percent loss
D)None of the above

Question 42

Investing directly in the international equities markets refers to buying shares

A)Of multinational corporations
B)Of foreign companies
C)Of internationally invested mutual funds
D)More than one of the above

Question 43

The investor can maximize risk reduction benefits by combining United States securities with those of countries which are _________.

A)Oil exporting nations
B)Negatively or least positively correlated with the United States
C)Correlated with the United States
D)None of the above

Question 44

A large number of foreign companies (over 200)have listed their stock on the New York Stock Exchange.

Question 45

Which of the following is NOT a valid reason for discounting the importance of stable foreign currency in evaluation international investment alternatives?

A)A devaluation in one country is usually offset by an increase in value in another
B)The overall effect of a devaluation in the economy of the country is insignificant
C)Risk exposure can be hedged through foreign exchange contracts or foreign currency options
D)All of the above are valid reasons

Question 46

Administrative problems such as different settlement procedures for various markets can best be avoided by

A)Becoming thoroughly comfortable with each country's procedures
B)Using a local broker
C)Investing in a mutual fund
D)None of the above

Question 47

There may be an opportunity for profit in a politically unstable country if

A)That country's domestic investors overreact in response to political changes
B)The regime in power is openly courting big business
C)The leaders of that country decide to cancel all foreign debt obligations
D)More than one of the above

Question 48

Between year end 2002 and 2005,the value of the United States equity markets as a percentage of the total World equity markets has

A)Increased 100 percent
B)Increased from 35 percent to 42 percent of the total developed market
C)Decreased from 53 percent to 33 percent of the total developed market
D)Decreased slightly from about 53 percent to 47 percent of total developed market

Question 49

Direct international investment without the numerous associated administrative problems can be achieved by purchasing shares

A)Of foreign firms which trade on the New York Stock Exchange or NASDAQ
B)In a mutual fund
C)In an exchange traded fund
D)Of multinational corporations

Question 50

The second largest equity market in the world at the end of 2005 is that of

A)Japan
B)The United Kingdom
C)The United States
D)Germany

Question 51

Which of the following statements about the information available on publicly traded foreign firms is NOT ?

A)At least the accounting standards are the same for U.S.and international companies
B)Comparative industry data is generally not available
C)If you purchase a foreign firm directly on a foreign market you will receive your annual reports in the language of the country which most likely will not be English
D)The information is less rigorously regulated than in the United States

Question 52

Which of the following might be a reason for higher return potential in certain foreign stock markets than in U.S.markets?

A)Some small economies have more growth potential because they are starting from a smaller base of GDP
B)GDP is growing at a faster rate in some countries than in the United States
C)Many of these foreign economies have older populations that spend a higher percentage of their income than the U.S.population
D)A and B are valid reasons

Question 53

The main problem associated with the taxation of foreign investors is

A)The withholding rate is frequently 40 percent higher than that of the United States
B)Dividends from some securities are taxed twice,once by the foreign government,and once by the United States government
C)The inconvenience of having to apply for a foreign tax credit on your U.S.income tax return and keeping track of the information over the tax year
D)None of the above

Question 54

Methods of indirect international investment include all of the following except

A)Buying shares of a multinational corporations
B)Investing in mutual or closed-end worldwide investment funds
C)Hiring a specialist in foreign investments
D)All of the above are methods

Question 55

Many U.S.companies like Exxon,IBM,and Coca Cola get more than 50 percent of their revenues from foreign markets.

Question 56

Which of the following statements about mutual funds and closed-end investment companies investing in foreign companies is ?

A)The fund managers are specialists at handling various foreign investment problems
B)It is difficult for track the stock prices of foreign equity investments
C)Professional management provides an opportunity for superior returns compared to the foreign market
D)All of the above are true

Question 57

Correlations between U.S.returns and foreign stock returns appear to remain fairly stable from period to period.

Question 58

Political risk can best be effectively reduced or eliminated

A)By investing only in European countries
B)Through sufficient international diversification
C)By investing only in countries friendly to the United States
D)All of the above

Question 59

An investor who wishes to achieve high returns and low risk exposure through international diversification would probably look for

A)Compound rate of return higher than that in the United States and a negative or low positive correlation of returns with the United States market
B)Stable currencies relative to the dollar,total market value potential higher than the United States and high correlation of returns
C)Compound rate of return equal to that of the United States and a correlation coefficient close to that of the United States
D)None of the above

Question 60

The benefits of American Depository Receipts (ADRs)are many.Which of the following is not a benefit?

A)ADRs allow foreign stocks to be traded very similarly to United States stocks
B)Commission rates on ADRs are generally lower because the actual stock certificate is held by a bank
C)Dividends are paid in United States dollars
D)The annual report you receive will be in English

Question 61

Specialists in international securities associated with financial management firms provide their expertise primarily to

A)Wealthy investors
B)Institutional investors
C)Managers of mutual funds
D)More than one of the above

Question 62

Which of the following are benefits of diversification into foreign securities?

A)Diversification offers opportunities for higher returns than a single country portfolio
B)Diversification reduces portfolio volatility
C)Returns between countries are not highly correlated
D)All of the above

Question 63

An investor can earn a higher return in foreign markets than in the U.S.because

A)A number of countries have superior real GDP growth rates compared to the U.S.
B)Of foreign competitiveness in traditional U.S.products such as automobiles and steel
C)Of the fact that many nations enjoy a higher savings rate than the United States,which leads to capital formation and potential investment opportunity
D)All of the above

Question 64

Indirect means of participating in foreign investments include purchasing:

A)Exchange traded funds
B)Open-end mutual funds specializing in foreign securities
C)Closed-end mutual funds
D)A and C

Question 65

Emerging markets have the following characteristics:

A)The combined market capitalization of Exxon,General Electric and Microsoft is bigger than any emerging market's capitalization including China
B)The International Monetary Fund separates developed and emerging markets by the market capitalization of the respective markets
C)Liquidity would be the same as a small company traded on the NASDAQ stock market
D)Continuous auction markets

Question 66

All of the following are obstacles to foreign investing,except:

A)Political risks associated with foreign nations
B)Language barriers
C)Diversification difficulties
D)Market efficiency

Question 67

(a.)You invest in the Canadian Equity market and you lose 20 percent (quoted in Canadian dollars).In the meantime the United States dollar declines by 5 percent against the Canadian dollar.What is your percentage gain or loss translated into dollars?
(b.)What if the United States dollar declines by 10 percent against the Canadian dollar,what would be your percentage gain or loss translated into dollars?

Question 68

When looking at the list of countries in the emerging market list,

A)China has the biggest market capitalization
B)Korean has the biggest market capitalization
C)Russia has the biggest market capitalization
D)Taiwan has the biggest market capitalization

Question 69

Assume you invest in the European Equity Market and have a 15 percent return (quoted in euros).
a.If during this period the euro appreciated by 10 percent against the dollar,what would be your actual return translated into United States dollars?
b.What if the euro declined by 10 percent against the dollar,what would your actual return be translated into dollars?
c.Recompute the answer based on a 15 percent decline in the euro against the dollar.
A.If during this period the euro appreciated by 10 percent against the dollar,what would be your actual return translated into United States dollars?
B.What if the euro declined by 10 percent against the dollar,what would your actual return be translated into dollars?
C.Recompute the answer based on a 15 percent decline in the euro against the dollar.
(a)
115% (15% profit)
1.10 (adjusted value of euro to United States dollar)
126.5 percent of original investment
actual return in United States dollars would be 26.5 percent
(b)
115% (15% profit)
.90 (adjusted value of euro to United States dollar)
103.5 percent of original investment
actual return in United States dollars would be 3.5 percent
(c)
115% (15% profit)
.85 (adjusted value of euro to United States dollar)
97.75 percent of original investment
actual return in United States dollars would be 2.25 percent

Question 70

The market capitalization of developed countries from 2005 to 2005

A)Increased by about $15 trillion,or approximately 74 percent
B)Decreased by about $13 trillion because of the currency crisis in Asia during 1987-98
C)Was relatively flat because of the U.S.stock market downturn of 2000-2002
D)Increased by about $13 trillion because of the inclusion of China,Korea,and Russia into the list of developed countries

Question 71

Indirect international investment effectively eliminates problems with

A)Taxation by foreign governments
B)Administration of foreign securities problems
C)Different cultures and reporting standards
D)All of the above

Question 72

Multinational corporations are firms that:

A)Are located in one country and invest in another
B)Operate in one country and export those goods to other countries
C)Operate in several countries
D)Have clients in several countries

Question 73

Which of the following reasons might explain why international investing might offer diversification benefits?

A)Companies operating in different countries will be affected differently by international events such as crop failures,energy prices,wars,tariffs,etc
B)Since the introduction of the euro,European and U.S.markets have a tendency to move in the same direction on an annual basis
C)World markets are highly correlated to the U.S.market since the U.S.is the engine of economic growth around the world
D)U.S.companies operating in foreign countries automatically provide the investor with diversification against foreign currency fluctuations

Question 74

There are several reasons why some analysts think that financial market have become more highly correlated in recent years.Which one does not belong?

A)The development of a global economy has made companies and those economies more connected and less diverse
B)The new European Central Bank has coordinated economic policy across the European Union making that region more coordinated
C)U.S.companies operating abroad like Coca Cola,McDonalds,and ExxonMobil are highly correlated with U.S.markets
D)Every time we have a world event such as September 11,2001,a currency crisis,or a market collapse somewhere,the international stock markets seem to fall together making them look like they are highly correlated

Question 75

An advantage to investing in foreign markets is:

A)Diversification
B)That it is easy to profit from foreign currency exchange
C)That there is more potential to profit from foreign markets than domestic markets
D)There is less risk involved in investing in foreign markets

Question 76

Developed countries' stock market returns have correlations to the U.S.market that

A)Are stable over the years
B)Seem to maintain their relative rank order to each other compared to the U.S.
C)Are consistently correlated to the U.S.markets at less than 1.00
D)As a group has seen their correlation decline over the last 42 years