Deck 26: International Investing

Question 1

Foreign investors most often invest in international markets using two methods including

A) hedging and speculating
B) margin buying and short selling
C) ordinary shares and American Depository Receipts
D) currency options and futures contracts

Answer 1

C

Question 2

Indirect investments in foreign firms that are helbanks are

A) SUP's.
B) ADR's.
C) SIPC's.
D) POD's.

Answer 2

B

Question 3

A bettor at a horse race has

A) zero-sum game.
B) expected value of zero.
C) positive expected return.
D) negative expected value.

Answer 3

D

Question 4

Investing in a foreign security involves all the risks associated with investing in a domestic security plus ____ risk

A) exchange rate
B) interest rate
C) commercial
D) reinvestment

Question 5

Interest rate parity explains why __ and ___ exchange rates differ resulting from different interest rates in the two countries.

A) futures and option
B) spot and forward
C) forward and futures
D) spot and future spot

Question 6

Investing in a foreign security involves all of the additional risks EXCEPT that

A) the currency in which the security is denominated will be removed from the international monetary gold standard
B) the government of the foreign investment will impose capital controls
C) the foreign securities market will not prove the necessary liquidity
D) information about the investment will not be readily available

Question 7

When an American buys a Swiss stock, he or she is actually making two investments, one in the stock and the other in the

A) Swiss franc
B) U.S. Dollar
C) German mark
D) Swiss government

Question 8

In sports betting, the bookmaker serves the same role as a

A) specialist.
B) floor broker.
C) investment banker.
D) dealer.

Question 9

In 1984, the proportion of the world equity and bond value that is from the U.S. was approximatelyy

A) 25%.
B) 85%.
C) 50%.
D) 10%.

Question 10

The Nikkei 225 is the major stock index for

A) England.
B) Korea.
C) Japan.
D) Germany.

Question 11

____ risk refers to the uncertainty in the return on a foreign financial asset owing to the possibility that the foreign government might take actions that are detrimental to the investor's financial interests.

A) Exchange rate
B) Political
C) Commercial
D) Interest rate

Question 12

The risk of not being able to convert foreign currency into domestic currency is

A) market.
B) political.
C) business.
D) exchange.

Question 13

If all economies were completely integrated, then stock markets in different countries would move together, and ______ could be gained through international diversification.

A) great advantage
B) little advantage
C) greater returns
D) greater risk

Question 14

Studies have founinvestors seeking the benefits of international ____.

A) diversification
B) interest rate differentials
C) purchasing power
D) correlation

Question 15

In 1984, the largest proportion of the world market wealth portfolio was

A) U.S. Residential Real Estate.
B) Foreign Domestic Bonds.
C) U.S. Business Real Estate.
D) Asia Equities.

Question 16

Financial markets in countries that have a relatively low level of per capital gross domestic product, improving political and economic stability, and securities available for investment by foreigners are known as

A) developing markets
B) less-developed economies
C) emerging markets
D) industrialized economies

Question 17

The return that a tangible asset can provide that a security investment does not is

A) dividends.
B) price appreciation.
C) consumption.
D) lower transaction costs.

Question 18

The approach to managing exchange risk which involves setting a policy concerning the desired level of risk is known as ___ currency management.

A) active
B) pro-active
C) hedging
D) passive

Question 19

A sports bettor who looks only at the past performance of a team is using the analysis technique of

A) technical.
B) fundamental.
C) trend.
D) random walk.

Question 20

American Depository Receipts are financial assets that are issued by a ____ and represent indirect ownership of a certain number of shares of a specific foreign firm that are held on deposit in a bank in the firm's home country.

A) U.S. brokerage
B) U.S. stock exchange
C) foreign brokerage
D) U.S. bank

Question 21

If an investor is uncertain whether to repatriate his or her capital gains from the sale of a foreign security due to the foreign government's capital controls, the uncertainty is known as _____ risk.

A) exchange rate
B) credit
C) investment
D) political

Question 22

One reason investor might prefer purchasing ADRs rather than the actual foreign stock is because

A) the ADRs are usually much less risky
B) the ADRs involve lower transaction costs than actually purchasing the foreign securities
C) foreign firms do not have to conform to U.S. accounting standards to list their ADRs on U.S. exchanges
D) foreign firms usually will list their securities as ADRs rather than as cross-listed stocks.

Question 23

In the U.S., the lowest standard deviation on returns appears to be gained through a portfolio of

A) U.S. based multinationals.
B) all foreign multinationals.
C) all ADR's.
D) domestic stocks and ADR's.

Question 24

A study of 17 countries found that the correlation between their domestic and currency risk averaged approximately

A) 0
B) -.5.
C) +.8.
D) +.5.

Question 25

For a 10-horse race, the total amount bet is $10,000 with $2,000 bet on Horse A. If the take is 10%, the odds for Horse A are

A) 5 to 1.
B) 7 to 2.
C) 9 to 1.
D) 10 to 2.

Question 26

A study showed that investing in U.S. based, multinational firms

A) actually increased foreign risk when compared to direct foreign investment.
B) increased the domestic risk.
C) did little to reduce foreign risk.
D) reduced foreign risk more than investing in non-U.S. multinationals.

Question 27

Between 1960-1984, investing in gold in the U.S.

A) had a lower average annual return than U.S. equities.
B) produced a higher standard deviation on returns than U.S. equities.
C) was less of an inflation hedge than U.S. equities.
D) showed a high, positive correlation of returns with U.S. equities.

Question 28

If a U.S. investor bought a portfolio of Japanese stocks at 102 yen to a U.S.dollar and the portfolio loses 20% over the year, what is the rate of return for the portfolio if the exchange rate at the end of the year is 81yen to a U.S. dollar?

A) .74%
B) -22%
C) 10.11%
D) -10.11%

Question 29

Foreign variance is approximately equal to

A) domestic variance x currency variance.
B) domestic variance + currency variance.
C) currency variance/domestic variance.
D) domestic variance/currency variance.

Question 30

An investor in a foreign country desires that the inflation rate in the foreign country will be

A) the same as in his country.
B) zero.
C) greater than in his country.
D) makes no difference for his total return.

Question 31

Compared to all NYSE stocks, the ADR's traded on the NYSE from 1973-1983 had

A) a slightly higher beta.
B) the same beta.
C) double the beta.
D) a much lower, positive beta.

Question 32

If interest rate parity prevails, an investor should ___ expect to make more by investing in fixed-income securities of a country that has _____ interest rates than the investor's home country.

A) always, higher
B) not, lower
C) not, higher
D) always, lower

Question 33

A 6-horse race has a total of $25,000 bet with $2,000 on horse D. If the take is 20%, the odds for Horse D are

A) 9 to 1.
B) 25 to 2.
C) 10 to 1.
D) 23 to 2.

Question 34

Because the SEC currently requires that foreign firms, who would like their securities listed on the U.S. exchange, prepare their financial statements using U.S accounting stanadards, the requirement

A) discourages weaker foreign firms from cross-listing in the U.S.
B) encourages weaker foreign firms to cross-list in the U.S.
C) acts as an incentive for foreign firms to list on U.S. exchanges
D) acts as a deterrent for foreign firms to list on U.S. exchanges

Question 35

A U.S. investor in a stock traded only in Italy earns 8% on the stock and loses 10% on the lira. His actual total return is

A) -2.8%.
B) -18%.
C) -1.2%.
D) -2%.

Question 36

The global investment strategy of investing in emerging markets for diversification purposes assumes that the markets are

A) highly correlated with home market securities
B) highly segmented and relatively inefficient compared to the global securities markets
C) integrated with the major global financial centers
D) correlated in their home and foreign economic cycles

Question 37

In the past low correlations of foreign stock price changes with U.S. stock price changes have

A) discouraged more global diversification of U.S. portfolios
B) encouraged more foreign diversification in U.S. portfolios
C) encourage more foreign diversification of U.S. portfolios
D) given little advantage to a globally diversified U.S. portfolio

Question 38

To protect against the risk of declining values of foreign currencies, an investor could

A) invest in foreign stocks with variable dividends.
B) export more to the country.
C) ignore it as there is no way to reduce the risk.
D) buy units of the home currency in the forward market.

Question 39

In a passive currency management strategy, exchange rate risk is reduced by

A) hedging activities such as the purchase of currency forward contracts
B) frequent changing of currency exposures to exploit short-run mispricings among currencies
C) a buy-and-hold methodology
D) the use of ADRs and cross-listed foreign stocks

Question 40

If a U.S. investor in a German company traded only in Germany earned an annual return of 15% on the stock and 8% on the mark's exchange rate, his actual total return is

A) 21.8%.
B) 9.8%.
C) 24.2%.
D) 16.2%.

Question 41

Why would investor use currency futures or forward contracts to hedge against exchange-rate risk?

A) to reduce the tax liabilities involved in windfall profits from an appreciating foreign currency
B) to eliminate political risk associated with exchange-rate risk
C) to reduce the uncertainty associated with the foreign company's ability to repay its debt
D) to reduce uncertainty concerning the exchange rate at which the foreign security holdings can be converted into domestic currency

Question 42

Which one of the following is NOT a type of political risk relevant only for foreign investors?

A) expropriation
B) blocked dividend payments
C) SEC investigations
D) exchange rate controls

Question 43

Which one of the following ways to actively manage currency exposure usually results in little reduction in currency risk to a portfolio? Use of a(n)

A) currency overlay manager who considers currency exposures alone
B) jointly decided currency exposure and securities selection
C) cash manager provided by the investors bank
D) securities analyst who conducts research on economic fundamentals surrounding exchange rate changes

Question 44

Which one of the following statements is NOT correct about globally diversifying a portfolio?

A) Diversification may lower the standard deviation of portfolio returns.
B) Diversification is effective even if correlation coefficients are above .9
C) The standard deviation of portfolio returns can be reduced if correlation coefficients do not equal 1.
D) Diversification using securities from segmented and rather price inefficient markets can reduce overall portfolio risk.

Question 45

Between 1960-1980, the correlations of equity returns between the world market and individual countries

A) averaged +.9.
B) averaged -.4.
C) averaged a small positive value with some being negative.
D) showed no benefit to foreign diversification.

Question 46

Which one of the following is NOT a relevant variable when determining the investor's optimal currency hedge?

A) correlations between currencies
B) the relative interest rates in both countries
C) the cost of hedging
D) the portions of the investor's portfolio allocated to foreign securities

Question 47

For thinvestor who wants the benefits of global diversification but does not want to own foreign securities, the most effective substitutes are

A) foreign currency holdings
B) foreign bank accounts
C) ADRs
D) forward and futures currency contracts