Deck 17: International Securities Markets

Question 1

From 1976-2009 Japan had the lowest equity market returns 13 out of 34 years.

Answer 1

True

Question 2

In the developing world,Germany has the second largest equity market after the United States.

Answer 2

False

Question 3

International diversification will provide low risk when the investor finds international securities having a compound rate of return equal to that of the United States and a correlation coefficient close to that of the United States portfolio.

Answer 3

False

Question 4

One of the biggest risks when investing in a foreign security market is the risk of currency exchange fluctuations.

Question 5

Political risk can best be effectively reduced or eliminated by investing only in companies of European countries.

Question 6

American depository receipts allow foreign stocks to be traded in the United States markets very similarly to U.S.stocks.

Question 7

The Securities Exchange Commission does not allow mutual funds to own foreign securities in their portfolios.

Question 8

U.S.multinational corporations are highly correlated with United States financial markets and therefore do not reduce portfolio risk to the same extent as investing in foreign corporations.

Question 9

Most major foreign firms listed on the New York Stock Exchange,such as Canada Pacific Railway,trade their stocks directly on the NYSE rather than using ADRs.

Question 10

Less developed countries may provide even greater risk returns in a portfolio than developed countries.

Question 11

Information on publicly traded foreign securities is not as regulated or as available as it is on United States securities.

Question 12

As a general rule,transaction costs are lower in foreign markets than in the United States.

Question 13

By combining foreign securities with domestic securities,investors increase their portfolio risk because foreign securities are more volatile than United States securities.

Question 14

At the peak of the stock market bubble in 1999,the value of the developed world's stock market was $33 trillion.By 2002,the value had declined to less than $21 trillion.By year-end 2005,after several years of worldwide economic growth,the developed markets reached $36.5 trillion.

Question 15

If the emerging markets were taken as a group at the end of 2005,their total market capitalization would rank them second behind the United States.

Question 16

Countries are divided into developed and emerging markets based on the market capitalization of their stock market.

Question 17

Foreign exchange risk is not a major concern to international investors because there have been fewer wide swings in currency values in recent years.

Question 18

Due to the lessened risk exposure through effective international portfolio diversification,the rate of return tends to be somewhat lower than on portfolios composed entirely of United States securities.

Question 19

The main advantage of international investment is that foreign markets may be negatively correlated with U.S.and other foreign markets.

Question 20

The United States equity markets accounted for over 50% of the value of the world equity market at the end of 2009.

Question 21

Brazil,China,and India have had the biggest increase in market capitalization of all the emerging market countries

Question 22

Currency fluctuations and rates of return are the only really important things to consider when investing internationally.

Question 23

Generally,foreign markets are more liquid and efficient than U.S.capital markets.

Question 24

Emerging markets often have market structures similar to those in the developed world and trade their securities in a continuous auction market.

Question 25

Correlations between U.S.returns and foreign stock returns appear to remain fairly stable from period to period.

Question 26

The data show that several markets such as the United States and Britain continually outperform the other developed markets such as Canada,Switzerland,and Japan.

Question 27

Correlations of foreign stock market movements to U.S.stock market movements show that the period from 1997 to 2002 had higher correlations than in the past.

Question 28

The market capitalization of the 20 largest U.S.companies would rank ahead of any emerging market's capitalization,including China by 2009.

Question 29

An "emerging market" is defined as a market where the country has a small capital market relative to the industrialized world.

Question 30

Risk exposure to foreign currency changes can be hedged through foreign exchange contracts or foreign currency options.

Question 31

Emerging markets seem to have fairly consistent valuation standards and ratios.

Question 32

Since the beginning of the 1990s,we have seen major growth in "emerging" markets,such as Chile,Mexico,Poland,and the Czech Republic.

Question 33

ADRs (American Depository Receipts)represent an ownership interest in a foreign company's common stock.

Question 34

One possible way of achieving international diversification in a portfolio is to invest in foreign firms which trade on United States markets or through ADRs.

Question 35

Even though Korea and China have markets bigger than some markets in developed countries,they are considered to be emerging markets because they have low per-capita gross domestic product.

Question 36

Investing in an international mutual fund does not help the investor avoid the administrative problems one would encounter if investing directly in foreign securities.

Question 37

The correlation coefficient measures the movement of one series of data to another series of data over the same time period.

Question 38

The best possible way of achieving international diversification is to invest in United States companies having a large share of their business coming from foreign investment.

Question 39

The currency crisis in South Asia caused a big decrease in the value of South Asian countries' market values between 1996 and 2002.

Question 40

At the end of 2005,North America,Asia Pacific,and Europe each accounted for one-third of the world's markets capitalization.

Question 41

An investor can earn a higher return in foreign markets than in the U.S.because:

A)a number of countries have superior real GDP growth rates compared to the U.S.
B)of foreign competitiveness in traditional U.S.products such as automobiles and steel.
C)of the fact that many nations enjoy a higher savings rate than the United States,which leads to capital formation and potential investment opportunity.
D)All of the above

Question 42

Specialists in international securities associated with financial management firms provide their expertise primarily to:

A)wealthy investors.
B)institutional investors.
C)managers of mutual funds.
D)More than one of the above

Question 43

Which of the following statements about the information available on publicly traded foreign firms is NOT true?

A)At least the accounting standards are the same for U.S.and international companies
B)Comparative industry data is generally not available
C)If you purchase a foreign firm directly on a foreign market,you will receive your annual reports in the language of the country,which most likely will not be English
D)The information is less rigorously regulated than in the United States

Question 44

The main problem associated with the taxation of foreign investors is:

A)the withholding rate is frequently 40% higher than that of the United States.
B)dividends from some securities are taxed twice,once by the foreign government,and once by the United States government.
C)the inconvenience of having to apply for a foreign tax credit on your U.S.income tax return and keeping track of the information over the tax year.
D)None of the above

Question 45

The investor can maximize risk reduction benefits by combining United States securities with those of countries which are ________.

A)oil-exporting nations.
B)negatively or least positively correlated with the United States.
C)correlated with the United States.
D)None of the above

Question 46

Between year-end 2002 and 2005,the value of the United States equity markets as a percentage of the total world equity markets has:

A)increased 100%.
B)increased from 35% to 42% of the total developed market.
C)decreased from 53% to 33% of the total developed market.
D)decreased slightly,from about 51% to 48% of total developed market.

Question 47

Which of the following is NOT a valid reason for discounting the importance of stable foreign currency in evaluating international investment alternatives?

A)A devaluation in one country is usually offset by an increase in value in another
B)The overall effect of a devaluation in the economy of the country is insignificant
C)Risk exposure can be hedged through foreign exchange contracts or foreign currency options
D)All of the above are valid reasons

Question 48

Direct international investment without the numerous associated administrative problems can be achieved by purchasing shares:

A)of foreign firms which trade on the New York Stock Exchange or NASDAQ.
B)in a mutual fund.
C)in an exchange-traded fund.
D)of multinational corporations.

Question 49

Which of the following statements about mutual funds and closed-end investment companies investing in foreign companies is true?

A)The fund managers are specialists at handling various foreign investment problems
B)It is difficult to track the stock prices of foreign equity investments
C)Professional management provides an opportunity for superior returns compared to the foreign market
D)All of the above are true

Question 50

Which of the following might be a reason for higher return potential in certain foreign stock markets than in U.S.markets?

A)Some small economies have more growth potential because they are starting from a smaller base of GDP
B)GDP is growing at a faster rate in some countries than in the United States
C)Many of these foreign economies have older populations that spend a higher percentage of their income than the U.S.population
D)A and B are valid reasons

Question 51

Methods of indirect international investment include all of the following except:

A)buying shares of a multinational corporation.
B)investing in mutual or closed-end worldwide investment funds.
C)hiring a specialist in foreign investments.
D)All of the above are methods

Question 52

An investor who wishes to achieve high returns and low risk exposure through international diversification would probably look for:

A)a compound rate of return higher than that in the United States and a negative or low positive correlation of returns with the United States market.
B)stable currencies relative to the dollar,total market value potential higher than the United States,and high correlation of returns.
C)a compound rate of return equal to that of the United States and a correlation coefficient close to that of the United States.
D)None of the above

Question 53

Investing directly in the international equities markets refers to buying shares:

A)of multinational corporations.
B)of foreign companies.
C)of internationally invested mutual funds.
D)More than one of the above

Question 54

The second largest equity market in the world at the end of 2005 was that of:

A)Japan.
B)the United Kingdom.
C)the United States.
D)Germany.

Question 55

There may be an opportunity for profit in a politically unstable country if:

A)that country's domestic investors overreact in response to political changes.
B)the regime in power is openly courting big business.
C)the leaders of that country decide to cancel all foreign debt obligations.
D)More than one of the above

Question 56

An advantage to investing in foreign markets is:

A)diversification.
B)that it is easy to profit from foreign currency exchange.
C)that there is more potential to profit from foreign markets than domestic markets.
D)that there is less risk involved in investing in foreign markets.

Question 57

Political risk can best be effectively reduced or eliminated:

A)by investing only in European countries.
B)through sufficient international diversification.
C)by investing only in countries friendly to the United States.
D)All of the above

Question 58

Indirect international investment effectively eliminates problems with:

A)taxation by foreign governments.
B)administration of foreign securities problems.
C)different cultures and reporting standards.
D)All of the above

Question 59

Administrative problems,such as different settlement procedures for various markets,can best be avoided by:

A)becoming thoroughly comfortable with each country's procedures.
B)using a local broker.
C)investing in a mutual fund.
D)None of the above

Question 60

An investment in Mexico produces a return of 80%.However,the Mexican peso has just declined by 45%,relative to the dollar.The previous value of the peso was $.0066.The adjusted return on the investment is a(n):

A)42% gain.
B)8.5% loss.
C)1.0% loss.
D)None of the above

Question 61

There are several reasons why some analysts think that financial markets have become more highly correlated in recent years.Which one does not belong?

A)The development of a global economy has made companies and those economies more connected and less diverse
B)The new European Central Bank has coordinated economic policy across the European Union,making that region more coordinated
C)U.S.companies operating abroad,like Coca Cola,McDonalds,and ExxonMobil,are highly correlated with U.S.markets
D)Every time we have a world event such as September 11,2001,a currency crisis,or a market collapse somewhere,the international stock markets seem to fall together,making them look like they are highly correlated

Question 62

a)You invest in the Canadian Equity market and you lose 20% (quoted in Canadian dollars).In the meantime,the United States dollar declines by 5% against the Canadian dollar.What is your percentage gain or loss,translated into dollars?
b)If the United States dollar declines by 10% against the Canadian dollar,what would be your percentage gain or loss,translated into dollars?

Question 63

Multinational corporations are firms that:

A)are located in one country and invest in another.
B)operate in one country and export those goods to other countries.
C)operate in several countries.
D)have clients in several countries.

Question 64

The market capitalization of developed countries from 2005 to 2009:

A)decreased by about $1.6 trillion,or approximately 4.5%.
B)decreased by about $13 trillion because of the currency crisis in Asia during 1987-98.
C)was relatively flat because of the U.S.stock market downturn of 2000-2002.
D)increased by about $13 trillion because of the inclusion of China,Korea,and Russia into the list of developed countries.

Question 65

Developed countries' stock market returns have correlations to the U.S.market that:

A)are stable over the years.
B)seem to maintain their relative rank order to each other compared to the U.S.
C)are consistently correlated to the U.S.markets at less than 1.00.
D)as a group,have seen their correlation decline over the last 42 years.

Question 66

Which of the following reasons might explain why international investing might offer diversification benefits?

A)Companies operating in different countries will be affected differently by international events such as crop failures,energy prices,wars,tariffs,etc.
B)Since the introduction of the euro,European and U.S.markets have a tendency to move in the same direction on an annual basis
C)World markets are highly correlated to the U.S.market since the U.S.is the engine of economic growth around the world
D)U.S.companies operating in foreign countries automatically provide the investor with diversification against foreign currency fluctuations

Question 67

Indirect means of participating in foreign investments include purchasing:

A)exchange-traded funds.
B)open-end mutual funds specializing in foreign securities.
C)closed-end mutual funds.
D)All of the options

Question 68

Emerging markets have the following characteristics:

A)the 20 largest U.S.companies added together by market capitalization are bigger than any emerging market capitalization except China.
B)the International Monetary Fund separates developed and emerging markets by the market capitalization of the respective markets.
C)liquidity would be the same as a small company traded on the NASDAQ stock market.
D)continuous auction markets.

Question 69

Assume you invest in the European Equity Market and have a 15% return (quoted in Euros).
a)If during this period the euro appreciated by 10% against the dollar,what would be your actual return,translated into United States dollars?
b)What if the euro declined by 10% against the dollar,what would your actual return be,translated into dollars?
c)Recompute the answer based on a 15% decline in the euro against the dollar.

Question 70

When looking at the list of countries in the emerging market list,

A)China has the biggest market capitalization.
B)Korea has the biggest market capitalization.
C)Russia has the biggest market capitalization.
D)Taiwan has the biggest market capitalization.

Question 71

All of the following are obstacles to foreign investing,except:

A)political risks associated with foreign nations.
B)language barriers.
C)diversification difficulties.
D)market efficiency.

Question 72

Which of the following are benefits of diversification into foreign securities?

A)Diversification offers opportunities for higher returns than a single-country portfolio
B)Diversification reduces portfolio volatility
C)Returns between countries are not highly correlated
D)All of the above