Deck 13: International Capital Market Equilibrium

Question 1

When a country unexpectedly opens its capital markets to the world economy,the real interest rate in the country should ________ dramatically.

A) rise
B) fall
C) segment
D) stabilize

Answer 1

B

Question 2

What is the name given to the funds that are sometimes restricted to a particular country?

A) restricted funds
B) world funds
C) regional funds
D) country funds

Answer 2

D

Question 3

Most investors' portfolios in different countries have a strong home bias which means they hold a ________ share of domestic assets compared to the ________ market portfolio.

A) proportionately medium, international
B) disproportionately small, world
C) proportionately large, international
D) disproportionately large, world

Answer 3

D

Question 4

What is the name for the process that allows inward and outward foreign equity investment?

A) equity market liberalization
B) market segmentation
C) market liberalization
D) market integration

Question 5

The capital asset pricing model was derived with simplified assumptions building on the original mean-variance optimizations analytics developed by ________.

A) Mossin
B) Sharpe
C) Lintner
D) Markowitz

Question 6

________ trade on the ________ equity market and represent a ________ portfolio that may invest in the world markets ________ restricted to a region.

A) Open-end funds, local, fixed, never
B) Closed-end funds, local, fixed, sometimes
C) Open-end funds, foreign, variable, often
D) Closed-end funds, foreign, variable, always

Question 7

In integrated markets,the covariance with the world should determine the expected return on the ________.

A) international market
B) world market
C) domestic market
D) country market

Question 8

The Sharpe ratio is measured as the ________ return relative to the ________ of the return.

A) risk, trade-off
B) variability, loss
C) average excess, volatility
D) risk, average excess

Question 9

The exposure of a return to fluctuations in the return on the market portfolio,which cannot be diversified away is called

A) market risk.
B) risk return.
C) idiosyncratic risk.
D) systematic risk.

Question 10

A hybrid alternative that is rapidly gaining popularity which trades on an exchange but where prices are kept close to the value of the underlying portfolio through arbitrage activities by a few institutional investors is called

A) exchange-traded fund.
B) open-end fund.
C) closed-end fund.
D) country fund.

Question 11

The arbitrage pricing theory recognizes that the return on the market portfolio may not be the only potential source of ________ that affect the returns on equities.

A) systematic risks
B) market risks
C) risks premium
D) equity risk

Question 12

For the most part,stocks are ________ ________,so you ________ diversify away all of a portfolio's variance.Because the average covariance is ________,even a large portfolio of international stock will have a ________ variance.

A) negatively related, can, negative, negative
B) negatively related, cannot, positive, negative
C) positively correlated, cannot, positive, positive
D) positively correlated, can, negative, positive

Question 13

The evidence of the phenomenon of home bias seems to be ________.

A) true for most developing countries
B) true for most developed countries
C) true for most countries in the world
D) untrue for the developed countries

Question 14

In a ________,the market portfolio is defined as the aggregate asset holdings of all investors in a particular country.

A) international CAPM
B) domestic CAPM
C) country CAPM
D) world CAPM

Question 15

What is the name given to the variance that cannot be diversified away?

A) nonsystematic covariance
B) market covariance
C) nonsystematic variance
D) systematic variance

Question 16

The locus of the portfolios in expected return-standard deviation space that have the minimum variance for each expected return is called

A) mean-variance efficient.
B) MVE portfolio.
C) mean standard deviation frontier.
D) efficient frontier.

Question 17

There has been a gradual increase in the correlations between the ________ that may be related to increased economic and financial integration.

A) NAFTA countries
B) Southeast Asian countries
C) Sub-Saharan countries
D) G7

Question 18

Today in an increasingly globalized world,it makes more sense to use an internationally diversified portfolio of securities as the market portfolio.This CAPM is called the ________.

A) international CAPM
B) domestic CAPM
C) country CAPM
D) world CAPM

Question 19

The portfolio on the minimum-variance frontier that maximizes the sharpe ratio is called

A) mean-variance frontier.
B) MVE portfolio
C) mean standard deviation frontier.
D) efficient frontier.

Question 20

The APT postulates that other economy-wide factors can systematically affect the returns on a large number of securities.These factors might include all of the following EXCEPT:

A) news about inflation.
B) interest rates.
C) gross national product.
D) unemployment rate.

Question 21

Suppose XYZ is a small value stock and that you use both the CAPM and the Fama-French model to compute its cost of capital.Under which model is the cost of capital for xyz likely to be higher?

Question 22

What are some benefits of a portfolio that is internationally diversified?

Question 23

Of the following G7 countries,which market returns have the highest correlation with U.S.returns?

A) Japan
B) Canada
C) France
D) U.K.

Question 24

Which one of the following causes the regression computation of a stock's beta to be imprecise?

A) total risk
B) systematic risk
C) idiosyncratic risk
D) home country bias

Question 25

To increase the Sharpe ratio for a portfolio,an investor would have to add which one of the following?

A) stocks that increase expected return of the portfolio
B) stocks that decrease expected return of the portfolio
C) stocks that increase the volatility of the portfolio
D) stocks that increase the correlation with other stocks in the portfolio

Question 26

Suppose Ford Motors managers would like to invest in a new production line and must determine a cost of capital for the investment.The beta for Ford is 1.185,the beta for the automobile industry is 0.97,the equity premium on the world market is assumed to be 6%,and the risk-free rate is 3%.Propose a range of cost-of-capital estimates to consider in the analysis.

Question 27

Which one of the following is the portfolio that maximizes the Sharpe ratio?

A) the one below the minimum-variance-efficient frontier
B) the one that lies on the minimum-variance-efficient frontier
C) the one above the minimum-variance-efficient frontier
D) the one that lies on the vertical axis of the minimum-variance-efficient frontier

Question 28

The Chinese stock markets trade shares issued by the same company for native Chinese and another share for foreign investors.What type of stock market would the Chinese markets be an examples of,a segmented or an integrated equity markets.Why?

Question 29

According to the CAPM how is the risk premium on an individual security calculated?

Question 30

Why is the computation of cost of capital likely to be higher under the Fama-French model than the CAPM?

A) The Fama-French model does not use the difference in the return on a portfolio of small.
B) The Fama-French model does not use return on the value-weighted market portfolio.
C) The CAPM does not measure the market correlation.
D) Fama-French has two additional factors.

Question 31

What would you expect to happen to the risk-free rate and equity returns when a segmented country opens its capital markets to foreign investment?

Question 32

What is the trend for the home bias phenomenon.