Deck 10: International Trade and Economic Growth

Question 1

Use the following information to answer questions
An investor is considering a portfolio consisting of 60% invested in Stock X and 40% invested in Stock Y. The expected returns for the stocks are 10% for Stock X and 8% for Stock Y. Variance of the stock returns are 0.04 for Stock X and 0.02 for Stock Y, and a covariance of -0.01 between the two stocks.
What is the expected return of the proposed portfolio?

A) 9.0%
B) 9.2%
C) 19.0%
D) 19.2%

Answer 1

9.2%

Question 2

Based on this table of correlation coefficients of real dollar returns of assets in different countries, which two countries appear to provide the greatest amount of benefit from diversification? $$\begin{array} { l r r r r } \hline & \text { US. } & \text { Japan } & \text { China } & \text { Brazil } \\\hline \text { U5. } & & & & \\\text { Japan } & 0.85 & & & \\\text { China } & 0.51 & 0.93 & & \\\text { Brazil } & 0.12 & - 0.21 & 0.06 & \\\hline\end{array}$$

A) The U.S. and Japan
B) China and Japan
C) Japan and Brazil
D) China and Brazil

Answer 2

Japan and Brazil

Question 3

Rather than directly issuing stock in the U.S. to obtain equity funds, foreign corporations can issue ___________, which are certificates representing underlying bundles of stock.

A) American Depositary Receipts
B) Special Drawing Rights
C) Mortgage backed securities
D) Put option

Answer 3

American Depositary Receipts

Question 4

Security A and Security B have a correlation coefficient of 0. If Security A's return is expected to increase by 10 percent,

A) Security B's return should also increase by 10 percent.
B) Security B's return should decrease by 10 percent.
C) Security B's return should be zero.
D) Security B's return is impossible to determine from the above information.

Question 5

ADR is:

A) a type of Eurodollar loans.
B) international mutual funds
C) a certificate represents shares of a foreign stock issued by a U.S. bank.
D) international reserve created by the IMF.

Question 6

Company specific risk is also known as:

A) market risk.
B) systematic risk.
C) non-diversifiable risk.
D) nonsystematic risk.

Question 7

Use the following information to answer questions
An investor is considering a portfolio consisting of 60% invested in Stock X and 40% invested in Stock Y. The expected returns for the stocks are 10% for Stock X and 8% for Stock Y. Variance of the stock returns are 0.04 for Stock X and 0.02 for Stock Y, and a covariance of -0.01 between the two stocks.
What is the variance of the proposed portfolio?

A) 0.0128
B) 0.0152
C) 0.0224
D) 0.0272

Question 8

Assume that you are considering a portfolio of two assets, A and B, with 40% invested in asset A and invested 60% in asset B. Assume also that the assets have the following statistics: $$\begin{array} { | l l l l | } \hline & \text { Return } & \text { Variance } & \text { Cavariance } \\\text { Astet A } & 20 \% & 0.20 & \\\text { Astet B } & 15 \% & 0.10 & - 0.01 \\\hline\end{array}$$ The portfolio expected return is ________ and the variance of the portfolio is _______.

A) Return = 20%
B) Return = 18%
C) Return = 17%
D) Return = 16%

Question 9

Capital market segmentation is a financial market imperfection caused mainly by:

A) Government regulations
B) High transactions costs
C) Political risk
D) All of the above contribute to the imperfection in financial markets.

Question 10

The risk present in all investment opportunities is known as ________ risk.

A) Systematic
B) Nonsystematic
C) Portfolio
D) Diversification

Question 11

Assume that the expected returns of the four portfolios are the same but their variances are as follows. Which of these four portfolios is the most risky?

A) 0.015
B) 0.020
C) 0.150
D) 0.095

Question 12

Assume that you are considering a portfolio of two assets, A and B, with 40% invested in asset A and invested 60% in asset B. Assume also that the assets have the following statistics: $$\begin{array} { | l l l l | } \hline & \text { Return } & \text { Variance } & \text { Cavariance } \\\text { Astet A } & 20 \% & 0.20 & \\\text { Astet B } & 15 \% & 0.10 & - 0.01 \\\hline\end{array}$$

A) Variance = 0.0480
B) Variance = 0.0632
C) Variance = 0.0656
D) Variance = 0.0728

Question 13

When a country moves from segmented capital market to globalized capital market, a firm located in this country can achieve:

A) lower cost of capital
B) greater availability of capital
C) lower risk premium on domestic assets
D) All of the above are correct.

Question 14

Security A and Security B have a correlation coefficient of - 1.0. If Security A's return is expected to increase by 10 percent,

A) Security B's return should also increase by 10 percent.
B) Security B's return should decrease by 10 percent.
C) Security B's return should be zero.
D) Security B's return is impossible to determine from the above information.

Question 15

If interest rates are equalized between two countries, why would we still observe two-way capital flow between these two countries?

A) Investors are irrational.
B) Investors want to diversify their portfolios.
C) Immigrants always invest in their home country's assets.
D) Assets across countries are homogeneous.

Question 16

A portfolio manager has decided to invest a total of $10 million on U.S. and Japanese portfolios. The expected returns are 12 percent on the U.S. portfolio and 20 percent on the Japanese portfolio. What is the expected return of an international portfolio with 40 percent invested in the U.S. portfolio and 60 percent invested in the Japanese portfolio?

A) 32.0%
B) 16.8%
C) 16.0%
D) 12.7%

Question 17

Assume that the expected returns of the four portfolios are the same but their variances are as follows. Which of these four portfolios would you select?

A) 0.015
B) 0.020
C) 0.150
D) 0.095

Question 18

Which of the following statements regarding portfolio risk and number of stocks is generally true?

A) Adding more stocks increases risk.
B) Adding more stocks decreases risk but does not eliminate it.
C) Adding more stocks has no effect on risk.
D) Adding more stocks increases only systematic risk.

Question 19

Which of the following statements is TRUE? I. Diversification is a process of removing systematic risk from a portfolio.
II) Diversification is a process of maximizing possible returns of a portfolio.

A) Only I is true.
B) Only II is true.
C) Both I and II are true.
D) Neither I nor II are true.

Question 20

Which of the following would not be considered a source of systematic risk?

A) a hostile takeover of a firm
B) a rise in inflation
C) a fall in GDP
D) a panic on Wall Street

Question 21

The return on the portfolio is a weighted average of the returns on the individual assets.

Question 22

When an investor prefers a portfolio that is diverse, has a smaller return than an alternative, and has a much smaller variance then the investor must be:

A) Risk seeking
B) Risk loving
C) Risk neutral
D) Risk averse

Question 23

A foreign firm has stock that can be purchased in New York, London, and Tokyo. The firm must be using an):

A) GDR
B) ADR
C) Variant stock
D) Preferred stock

Question 24

Risk premiums decrease for domestic assets when:

A) The domestic government prohibits foreign investors
B) Domestic investors fail to properly diversify internationally
C) A country moves from a global market to a segmented market
D) A country moves from a segmented market to a global market

Question 25

Which of the following reasons does not support the home-bias theory?

A) Nationalism support of home stock
B) Knowledge about domestic firms
C) Knowledge about foreign firms
D) Stocks measured against local conditions

Question 26

ADRs are used by domestic investors because the certificates provide:

A) Greater returns than foreign stocks purchased in foreign markets.
B) A way to avoid transaction costs associated with currency exchange.
C) A tax-free investment.
D) A way to avoid foreign exchange risk

Question 27

The ________ the variance of variability of returns on a portfolio, the more ________ the returns on the portfolio.

A) Smaller, dangerous
B) Smaller, diversified
C) Larger, diversified
D) Larger, uncertain

Question 28

A stock market in which foreign investors are not allowed to buy domestic stocks and domestic investors are not allowed to buy foreign stocks is called a segmented market.

Question 29

Investors often hold ________ to reduce risk associated with investments.

A) Domestic currency contracts
B) Letters of credit
C) Diversified portfolios
D) Forward contracts only

Question 30

The surprisingly low level of international assets in investment portfolios reflect investors' decisions to hold undiversified portfolios is known as the home-bias puzzle.

Question 31

Consider two securities known as Security A and B. If returns on Security A decrease 10% while returns on Security B also decrease 10%, then the correlation coefficient is:

A) Positive
B) Negative
C) Zero
D) Impossible to determine

Question 32

Portfolio diversification eliminates the systematic risk that is unique to an individual asset although nonsystematic risk will remain.

Question 33

For an investor, nonsystematic risk can be eliminated through:

A) Portfolio diversification
B) Avoiding transaction costs
C) Increased variance
D) Sterilization

Question 34

According to the theory of capital flows, there should exist one-way capital flow which will stop when interest rates are:

A) Greater then international average in one country.
B) Low in country receiving capital, but high in the other.
C) Below the international average of interest rates.
D) Exactly the same.

Question 35

The home-bias puzzle could be used to describe:

A) The gains investors earn when over investing in foreign markets.
B) The lack of international diversification in the United States.
C) The increased preference for high variance investments in the domestic market.
D) The surprisingly low level of domestic investment in the United States.

Question 36

Which of the following are possible explanations for incomplete portfolio diversification? I. Transaction costs
II) Home bias
III) Information costs
IV) Taxes

A) I and II
B) II and III
C) II and IV
D) I, II, III, and IV

Question 37

A certificate that represents shares of a foreign stock issued by a U.S. bank is called an):

A) Letter of credit
B) American depository receipt
C) Foreign credit
D) Exchange contract

Question 38

The risk present in all investment opportunities is known as systematic risk.

Question 39

Investors include various assets in the portfolio, to ________ the variability of the portfolio's returns.

A) Simplify
B) Increase
C) Decrease
D) Equalize

Question 40

When the ________ of two assets is _______, then the two variables move in opposite directions: when one rises the other falls.

A) Covariance, negative
B) Covariance, positive
C) Variability, negative
D) Variability, positive

Question 41

A GDR is similar to the ADR except that it is:

A) Sold only to preferred investors
B) Available in more than one market
C) A high variance investment
D) A low variance investment

Question 42

A stock market in which foreign investors are not allowed to buy domestic stocks and domestic investors are not allowed to buy foreign stocks is called an):

A) International market
B) Segmented market
C) Domestic market
D) Globalized market

Question 43

The smaller the variance of variability of returns on a portfolio, the more uncertain the returns on the portfolio.

Question 44

Portfolio diversification explains the two-way flow of capital between countries.

Question 45

Which of the following are possible explanations for incomplete portfolio diversification? I. Risk aversion
II) Home bias
III) Foreign bias
IV) Political risk

A) I and II
B) II and IV
C) I, III, and IV
D) I, II, and IV

Question 46

The risk present in all investment opportunities is known as systematic risk.

Question 47

The weighted average of the returns on the individual assets is know as the

A) Diversification process
B) Covariance average
C) Return on the portfolio
D) Systematic risk

Question 48

Which of the following are reasons for foreign firms to list their shares in the United States? I. Ability to raise new capital in world's largest financial base
II) Enlarged investor base
III) Lower transactions costs
IV) Eliminate foreign exchange risk

A) I and II
B) I, III, and IV
C) I, II, and III
D) I, II, III, and IV

Question 49

Use the following information for 14-15.
Assume that you have a choice of two assets, A and B, and a portfolio of an equal share of the two assets. Assume also that the assets have the following statistics:
Table 10.1:
$$\begin{array} { | l l l l | } \hline & \text { Return } & \text { Variance } & \text { Covari } \\\text { Asmt A } & 20 \% & 0.10 & \\\text { AEnet B } & 16 \% & 0.02 & 0.01 \\\hline\end{array}$$

-See Table 10.1. The negative covariance between Asset A and Asset B means that when returns on Asset A decrease then,

A) The variance of Asset B tends to decreases
B) The returns on Asset B tend to decrease
C) The returns on Asset B tend to increase
D) The variance on Asset A tends to decreases

Question 50

Consider the following variances of different stocks all with the same expected returns. Which stock represents the best choice for a risk averse investor?

A) Stock A: 0.03
B) Stock B: 0.25
C) Stock C: 0.005
D) Stock D: 0.22

Question 51

Consider the following variances of different stocks all with the same expected returns. Which stock represents the riskiest choice?

A) Stock A: 0.03
B) Stock B: 0.25
C) Stock C: 0.005
D) Stock D: 0.22

Question 52

A globalized market is a stock market where domestic investors can hold both domestic and foreign stocks.

Question 53

When the covariance of two assets is negative, then the two variables move in opposite directions: when one rises the other falls.

Question 54

When the ________ of two assets is _______, then the two variables rise together and fall together.

A) Covariance, negative
B) Covariance, positive
C) Variability, negative
D) Variability, positive

Question 55

Consider two securities known as Security A and B. If returns on Security A decrease 10% while returns on Security B increase 10%, then the correlation coefficient is:

A) Positive
B) Negative
C) Zero
D) Impossible to determine

Question 56

Use the following information for 14-15.
Assume that you have a choice of two assets, A and B, and a portfolio of an equal share of the two assets. Assume also that the assets have the following statistics:
Table 10.1:
$$\begin{array} { | l l l l | } \hline & \text { Return } & \text { Variance } & \text { Covari } \\\text { Asmt A } & 20 \% & 0.10 & \\\text { AEnet B } & 16 \% & 0.02 & 0.01 \\\hline\end{array}$$

-See Table 10.1. If your portfolio includes a combination of 20% Asset A and 80% Asset B, then your expected return is:

A) 16.8 %
B) 18 %
C) 19.2 %
D) 24 %