Deck 23: International Finance and Investments: Understanding Foreign Markets and Risks

Question 1

The interest rate on a 1-year Canadian security is 1.8%.The current exchange rate is C$= US $1.035.The 1-year forward rate is C$= US $1.05.The return (denominated in U.S.$)that a U.S.investor can earn by investing in the Canadian security is _________.

A) 3.27%
B) 1.45%
C) 1.045%
D) 0.045%
E) none of these

Answer 1

A

Question 2

Suppose the 1-year risk-free rate of return in Canada is 4% and the 1-year risk-free rate of return in Britain is 7%.The current exchange rate is 1 pound = C $1.65.A 1-year future exchange rate of __________ for the pound would make a Canadian investor indifferent between investing in the Canadian security and investing the British security.

A) 1.6037
B) 2.0411
C) 1.7500
D) 2.3369
E) none of these

Answer 2

A

Question 3

Assume there is a fixed exchange rate between the Canadian and U.S.dollar.The expected return and standard deviation of return on the U.S.stock market are 18% and 15%,respectively.The expected return and standard deviation on the Canadian stock market are 13% and 20%,respectively.The covariance of returns between the U.S.and Canadian stock markets is 1.5%.If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the expected return on your portfolio would be _________.

A) 12.0%
B) 12.5%
C) 13.0%
D) 15.5%
E) none of these

Answer 3

D

Question 4

According to Datastream,the __________ equity market had the highest average return in 2009 in U.S.dollars.

A) Canadian
B) Australian
C) Russian
D) Brazilian
E) none of these

Question 5

Of developed countries,the __________ equity market had the highest beta with the U.S.index between 1999 and 2008.

A) Japanese
B) German
C) U.K.
D) Canadian
E) none of these

Question 6

Suppose the 1-year risk-free rate of return in Canada is 2%.The current exchange rate is 1 pound = C $1.60.The 1-year forward rate is 1 pound = C $1.57.What is the minimum yield on a 1-year risk-free security in Britain that would induce a Canadian investor to invest in the British security?

A) -1.88%
B) .09%
C) 1.91%
D) 3.95%
E) none of these

Question 7

Security analysis of foreign companies is complicated by _________.

A) differences in accounting for depreciation
B) differences in contingency reserve practices
C) differences in tax reporting practices
D) differences in calculating the number of shares used to compute P/E ratios
E) all of these.

Question 8

The __________ index is a widely used index of non-U.S.stocks.

A) CBOE
B) Dow Jones
C) EAFE
D) all of these
E) none of these

Question 9

Assume there is a fixed exchange rate between the Canadian and U.S.dollar.The expected return and standard deviation of return on the U.S.stock market are 18% and 15%,respectively.The expected return and standard deviation on the Canadian stock market are 13% and 20%,respectively.The covariance of returns between the U.S.and Canadian stock markets is 1.5%.If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the standard deviation of return of your portfolio would be _________.

A) 12.53%
B) 15.21%
C) 17.50%
D) 18.75%
E) none of these

Question 10

__________ are mutual funds that invest in one country only.

A) ADRs
B) ECUs
C) single-country funds
D) all of these
E) none of these

Question 11

The present exchange rate is C$= U.S.$1.05.The one year future rate is C$= U.S.$1.04.The yield on a 1-year U.S.bill is 3%.A yield of __________ on a 1-year __________ Canadian bill will make investor indifferent between investing in the U.S.bill and the Canadian bill.

A) .24%
B) .96%
C) 2.02%
D) 4.00%
E) none of these

Question 12

Shares of several foreign firms are traded in the U.S.markets in the form of

A) ADRs
B) ECUs
C) single-country funds
D) all of these
E) none of these

Question 13

In 1998,the largest proportion of market capitalization in the EAFE index was represented by ___________;by 2007 this country's proportion had __________:

A) the United Kingdom,risen
B) Germany,risen
C) Japan,fallen
D) Australia,fallen
E) the United States,fallen

Question 14

In 2007,the Canadian equity market represented __________ of the world equity market.

A) 2.7%
B) 2.9%
C) 3.5%
D) 4.7%
E) none of these

Question 15

The performance of an internationally diversified portfolio may be affected by

A) country selection
B) currency selection
C) stock selection
D) all of these
E) none of these

Question 16

The yield on a 1-year bill in the U.K.is 1.5% and the present exchange rate is 1 pound = C $1.60.If you expect the exchange rate to be 1 pound-C $1.50 a year from now,the return a Canadian investor can expect to earn by investing in U.K.bills is

A) -6.25%
B) -4.84%
C) 0%
D) 8.27%
E) none of these

Question 17

Of developed countries,the __________ equity market had the highest correlation with the U.S.index between 1999 and 2008.

A) Japanese
B) Chinese
C) U.K.
D) Canadian
E) none of these

Question 18

__________ refers to the possibility of expropriation of assets,changes in tax policy,and the possibility of restrictions on foreign exchange transactions.

A) default risk
B) foreign exchange risk
C) market risk
D) political risk
E) none of these

Question 19

A study over the period 2001-2005 showed that most correlations between the U.S.stock index and stock-and bond-index portfolios of other countries were

A) negative
B) positive
C) positive for stocks and negative for bonds
D) negative for stocks and positive for bonds
E) none of these

Question 20

The straightforward generalization of the simple CAPM to international stocks is problematic because _________.

A) inflation risk perceptions by different investors in different countries will differ as consumption baskets differ
B) investors in different countries view exchange rate risk from the perspective of different domestic currencies
C) taxes,transaction costs and capital barriers across countries make it difficult for investor to hold a world index portfolio
D) all of these
E) none of these.

Question 21

Foreign index funds such as WEBS may be more useful as diversification tools than closed-end funds or ADRS because

A) they have similar expense ratios to open-end country funds.
B) they are well-diversified and continuously priced.
C) they sell at a discount to net asset value.
D) they are actively managed.
E) all of these.

Question 22

Investors looking for effective international diversification should

A) invest about 60% of their money in foreign stocks.
B) invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market.
C) frequently hedge currency exposure.
D) both a and b.
E) none of these.

Question 23

The major concern that has been raised with respect to the weighting of countries within the EAFE index is

A) currency volatilities are not considered in the weighting.
B) cross-correlations are not considered in the weighting.
C) inflation is not represented in the weighting.
D) the weights are not proportional to the asset bases of the respective countries.
E) none of these

Question 24

When an investor adds international stocks to her portfolio

A) it will raise her risk relative to the risk she would face just holding U.S.stocks.
B) she can reduce its risk relative to the risk she would face just holding U.S.stocks.
C) she will increase her expected return,but must also take on more risk.
D) it will have no significant impact on either the risk or the return of her portfolio.
E) she needs to seek professional management because she doesn't have access to international stocks on her own.

Question 25

Exchange rate risk

A) results from changes in the exchange rates in the currencies of the investor and the country in which the investment is made.
B) can be hedged by using a forward or futures contract in foreign exchange.
C) cannot be eliminated.
D) a and c.
E) a and b.

Question 26

The correlation coefficients between the returns on a broad index of Canadian stocks and the returns on indices of the stocks of other industrialized countries are,in general,_________,while the correlation coefficients between the returns on various diversified portfolios of Canadian stocks are,in general,_________.

A) less than 0,greater than 0
B) greater than 0,less than 0
C) less than 0.8,greater than 0.8
D) greater than 0.8,less than 0.8
E) less than 0,less than 0

Question 27

Home bias refers to

A) the tendency to vacation in your home country instead of traveling abroad.
B) the tendency to believe that your home country is better than other countries.
C) the tendency to give preferential treatment to people from your home country.
D) the tendency to overweight investments in your home country.
E) none of these

Question 28

Which of the following countries has an equity index that lies on the efficient frontier generated by allowing international diversification?

A) the United States
B) the United Kingdom
C) Japan
D) Norway
E) none of these-each of these countries' indexes fall inside the efficient frontier.

Question 29

Calculate Da Gama's currency selection return contribution.

A) +20%
B) -5%
C) +15%
D) +5%
E) -10%
EAFE: (.30)(10%)+ (.10)(-10%)+ (.60)(30%)= 20% appreciation;Da Gama: (.25)(10%)+ (.25)(-10%)+ (.50)(30%)= 15% appreciation;Loss of 5% relative to EAFE.

Question 30

Using the S & P500 portfolio as a proxy of the market portfolio

A) is appropriate because U.S.securities represent more than 60% of world equities.
B) is appropriate because most U.S.investors are primarily interested in U.S.securities.
C) is appropriate because most U.S.and non-U.S.investors are primarily interested in U.S.securities.
D) is inappropriate because U.S.securities make up less than 50% of world equities.
E) is inappropriate because the average U.S.investor has less than 20% of her portfolio in non-U.S.equities.

Question 31

In the long run,diversifying into international markets is most likely to benefit Canadian investors

A) when Canadian markets are performing poorly.
B) when Canadian markets are performing well.
C) under all Canadian market conditions.
D) under no circumstances.
E) only when currency risk is hedged.

Question 32

The EAFE is

A) the East Asia Foreign Equity index.
B) the Economic Advisor's Foreign Estimator index.
C) the European and Asian Foreign Equity index.
D) The Eastern Asian and French Equity index.
E) the European,Australian,Far East index.

Question 33

"ADRs" stands for ___________ and "WEBS" stands for ___________.

A) Additional Dollar Returns;Weekly Equity and Bond Survey
B) Additional Daily Returns;World Equity and Bond Survey
C) American Dollar Returns;World Equity and Bond Statistics
D) American Depository Receipts;World Equity Benchmark Shares
E) Adjusted Dollar Returns;Weighted Equity Benchmark Shares

Question 34

International investing

A) cannot be measured against a passive benchmark,such as the TSX Composite.
B) can be measured against a widely used index of non-U.S.stocks,the EAFE index (Europe,Australia,Far East).
C) can be measured against international indexes computed by Morgan Stanley,Salomon Brothers,First Boston and Goldman,Sachs,among others.
D) b and c.
E) none of these.

Question 35

Calculate Da Gama's country selection return contribution.

A) 12.5%
B) -12.5%
C) 11.25%
D) -1.25%
E) 1.25%
EAFE: (.30)(10%)+ (.10)(5%)+ (.60)(15%)= 12.5%;Da Gama: (.25)(10%)+ (.25)(5%)+ (.50)(15%)= 11.25%;Loss of 1.25% relative to EAFE.

Question 36

A 1988 study by Richard Roll showed that

A) international equity markets move completely independently.
B) a world factor seems to be present in the returns of all countries.
C) there is no value in international diversification.
D) both a and c are true.
E) all of these are true.

Question 37

You are a Canadian investor who purchased British securities for 2,000 pounds one year ago when the British pound cost $1.50.No dividends were paid on the British securities in the past year.Your total return based on Canadian dollars was __________ if the value of the securities is now 2,400 pounds and the pound is worth $1.60.

A) 16.7%
B) 20.0%
C) 28.0%
D) 40.0%
E) none of these

Question 38

Calculate Da Gama's stock selection return contribution.

A) 1.0%
B) -1.0%
C) 3.0%
D) 0.25%
E) none of these.

Question 39

WEBS portfolios

A) are passively managed.
B) are shares that can be sold by investors.
C) are free from brokerage commissions.
D) a and b
E) a,b,and c

Question 40

The average country equity market share is

A) less than 2%
B) between 3% and 4%
C) between 5% and 7%
D) between 7% and 8%
E) greater than 8%

Question 41

Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.

Question 42

Aunt Gunda holds her portfolio 100% in Canadian securities.She tells you that she believes foreign investing can be extremely hazardous to her portfolio.She's not sure about the details,but has "heard some things".Discuss this idea with Aunt Gunda by listing three objections you have heard from your clients who have similar fears.Explain each of the objections is subject to faulty reasoning.

Question 43

Discuss some of the accounting comparability problems involved in international investing.