Question 1

Suppose you buy a share of Siemens at a price of €8During the year, you receive a dividend of €2 and the € rises by 8%. If the stock price at yearend is €80, what was your total dollar return for the year?

Accepted Answer

The answer of Suppose you buy a share of Siemens...

Question 2

Which one of the following is NOT a barrier to international diversification.

Accepted Answer

Easy convertibility of many currencies is actually a facilitator of international diversification, as it allows for easier movement of funds between different countries and currencies. Lack of foreign market liquidity, inadequate information, and lack of international accounting standards can all be potential barriers to international diversification.

Question 3

Suppose an investor buys a UK bond with a coupon rate of 8% at its price of £990. The bond's face value is £1,000. If the British pound depreciates by 5%, at what end- of-year selling price of this bond will the dollar return on the bond just equal 10%?

Accepted Answer

The initial investment is £990 for a bond with face value of £1,000 and coupon rate of 8%. Therefore, the annual coupon payment is:

Coupon payment = 8% x £1,000 = £80

If the British pound depreciates by 5%, it means that the new exchange rate is £1 = $0.95. Therefore, the initial investment in dollars is:

Initial investment = £990 x $0.95 = $940.50

Let's assume that the end-of-year selling price of the bond is x pounds. The total return in pounds, including coupon payment, is:

Total return = coupon payment + (selling price - buying price)

Total return = £80 + (x - £990)

To find the selling price that would give a dollar return of 10%, we need to convert the total return in pounds to dollars using the new exchange rate. We also know that the initial investment in dollars was $940.50, and we want a total dollar return of 10%. Therefore:

0.1 = (total return in dollars / initial investment in dollars)

0.1 = ((total return in pounds x exchange rate) / $940.50)

Solving for the selling price (x), we get:

x = (£990 + ($0.095 x $940.50 - £80)) / (1 - 0.05)

x = £1,061.58

Therefore, the end-of-year selling price of the bond that would give a dollar return of 10% is approximately £1,062, which is closest to choice A) 1062.

Question 4

Assume the standard deviation of the U.S. market portfolio is 1the standard deviation of the non?U.S. portion of the world portfolio is 1and the correlation between the U.S. and non?U.S. market portfolios is .4Suppose you invest 40% of your money in the U.S. stock market and the other 60% in the non?U.S. portfolio. What is the standard deviation of your portfolio?

Accepted Answer

The standard deviation of the portfolio is calculated using the formula: √[(w1^2 * σ1^2) + (w2^2 * σ2^2) + (2 * w1 * w2 * σ1 * σ2 * correlation)], where w1 and w2 are the weights, σ1 and σ2 are the standard deviations, and correlation is the correlation coefficient. Plugging in the values: √[(0.4^2 * 1^2) + (0.6^2 * 1^2) + (2 * 0.4 * 0.6 * 1 * 1 * 0.4)] = √[0.16 + 0.36 + 0.192] = √0.712 = 0.843, or 15.1%.

Question 5

Assume the standard deviation of the U.S. market portfolio is 1the standard deviation of the non?U.S. portion of the world portfolio is 1and the correlation between the U.S. and non?U.S. market portfolios is .4Suppose you invest 25% of your money in the U.S. stock market and the other 75% in the non?U.S. portfolio. What is the standard deviation of your portfolio?

Accepted Answer

The standard deviation of the portfolio is calculated using the formula: √(w1²σ1² + w2²σ2² + 2w1w2σ1σ2ρ), where w1 and w2 are the weights, σ1 and σ2 are the standard deviations, and ρ is the correlation. Plugging in the values: √(0.25²*1² + 0.75²*1² + 2*0.25*0.75*1*1*0.4) = √(0.0625 + 0.5625 + 0.15) = √0.775 = 0.88 or 15.5%.

Question 6

What country's depreciation in 1994 led the stock market tumble by other Latin American stock markets?

Accepted Answer

The depreciation in 1994 referred to in the question is most likely the Mexican peso crisis, which occurred in December 1994. This crisis had significant ripple effects throughout Latin America, causing stock markets in other countries to tumble as well. Therefore, the correct answer is A) Mexico.

Question 7

Suppose an investor buys a share of Sony at a price of ¥38,720 at the start of the year. During the year, the investor receives a dividend of ¥500. At the end of the year, the price of Sony is ¥49,560. During the year, the exchange rate goes from ¥150 = $1 to ¥175 = $What was the investor's dollar return on Sony?

Accepted Answer

First, we need to calculate the yen return on Sony:

Yen return = (Ending price + Dividends - Starting price) / Starting price = (49,560 + 500 - 38,720) / 38,720 = 0.291

Next, we need to convert the yen return to dollars using the exchange rate at the end of the year:

Dollar return = Yen return x End of year exchange rate = 0.291 x (1/175) = 0.01082

Therefore, the investor's dollar return on Sony is 10.82% (rounded to two decimal places), which corresponds to choice B.

Question 8

Suppose an investor buys a share of British Petroleum at a price of £32 at the start of the year. During the year, the investor receives a dividend of £At the end of the year, the price of BP is £3During the year, the exchange rate goes from £1 = $to £1 = $What was the investor's dollar return on BP?

Accepted Answer

The answer of Suppose an investor buys a share of...

Question 9

International diversification provides a better risk-return trade-off than does investing solely in U.S. securities primarily because

Accepted Answer

The economic cycles of different countries may not be perfectly in phase, meaning that while the U.S. market may be experiencing a downturn, other markets may be performing well. This diversification can provide a better risk-return trade-off. Option A is incorrect because even if foreign industries don't exist in the U.S., investing in those industries through multinational corporations would still lead to a diversification benefit. Option B is not necessarily true as quantity does not necessarily equate to quality or diversification benefit. Option D is also incorrect as the point of diversification is to reduce correlation between assets, so if foreign securities simply followed U.S. markets, there would be little diversification benefit.

Question 10

Which of the following statements is most CORRECT with respect to international diversification?

Accepted Answer

While diversification can potentially reduce risk through spreading investments across different markets, the gains from diversification may be diminished due to combined correlations and volatility in world markets. This means that during times of high volatility, correlations between markets can become stronger and reduce the benefits of diversification. Therefore, statement A is the most correct. Statements B, C, and D are incorrect as they do not accurately reflect the complexities and uncertainties involved in international diversification.

Quiz 15: International Portfolio Investment