Question 1

Correlations between national stock markets are fairly stable over time.

Accepted Answer

They vary considerably over time.

Question 2

The benefits of international diversification are limited by the lack of _______ in foreign markets.

Accepted Answer

The benefits of international diversification can be limited by a lack of adequate information, free convertibility of currencies, and liquidity in foreign markets. These factors can hinder investors' ability to effectively diversify their portfolios internationally.

Question 3

The correlation between returns on companies in the same industry and domiciled in the same country is usually greater than the correlation between returns on companies in the same industry but in different countries.

Accepted Answer

This is because companies in the same industry and domiciled in the same country are likely to be affected by similar macroeconomic factors such as government policies, interest rates, and currency movements compared to companies in the same industry but in different countries.

Question 4

The perfect market assumptions include each of the following EXCEPT

Accepted Answer

Equal access to registered brokers is not a standard assumption of perfect market theory. Perfect market assumptions typically include no transaction costs (frictionless markets), no costs of financial distress, rational investors, and equal access to market information (which could be interpreted as market prices), but not specifically equal access to registered brokers.

Question 5

The extent to which risk is reduced by portfolio diversification does not depend on the correlations between assets in the portfolio.

Accepted Answer

It depends very much upon the correlations.

Question 6

You live in London and have invested in shares of Societe Gererale de Belgique at a price of €52.00. By the end of the year you have received dividends of €1.00, share price has risen to €54.50, and the pound has fallen 20% against the euro. Which of the following is closest to your pound sterling return for the year?

Accepted Answer

Step 1: Pound sterling initial investment = €52.00 / 0.8 = £65.00 (due to 20% fall in the pound).

Step 2: Pound sterling dividend received = €1.00 / 0.8 = £1.25 (due to 20% fall in the pound).

Step 3: Pound sterling value of shares at the end of the year = €54.50 / 0.8 = £68.13 (due to 20% fall in the pound).

Step 4: Total pound sterling return for the year = (Pound sterling dividends + Pound sterling value of shares at the end of the year - Pound sterling initial investment) / Pound sterling initial investment x 100%.

= (£1.25 + £68.13 - £65.00) / £65.00 x 100% = 33.51%.

Therefore, the closest answer is E (+33%).

Question 7

Suppose E[r_A] = 14.8%, $\sigma$_A = 17.9%, E[r_B] = 17.1%, and $\sigma$_B = 31.9%. Assuming a mean-variance framework, which of the following statements is true?

Accepted Answer

The answer of Suppose E[r_A] = 14.8%, $\sigma$_A = 17.9%,...

Question 8

Which of the following conditions is sufficient to ensure an operationally efficient market?

Accepted Answer

The answer of Which of the following conditions is sufficient...

Question 9

You live in New York and buy a share of Phillips at a price of 166 euros. At the end of the year, you receive a dividend of 4 euros and the stock price is 160 euros. If the euro appreciates by 8% during the year, what was your percentage return in dollars for the year?

Accepted Answer

The answer of You live in New York and buy...

Question 10

The standard deviation of return to the Indian stock market is 24.8% in local currency. The standard deviation of the Indian rupee against the Canadian dollar is 30.2%. Ignoring interactions between the Indian stock market and the value of the Indian rupee, what is the standard deviation of return of the Indian market to a Canadian investor?

Accepted Answer

To calculate the standard deviation of the Indian market to a Canadian investor, we need to use the concept of covariance. 
Covariance = correlation coefficient * standard deviation of market * standard deviation of exchange rate
Since there is no information about the correlation coefficient, we assume it to be zero as there are no interactions between the Indian stock market and the value of the Indian rupee. 
Therefore, 
Covariance = 0 * 24.8% * 30.2% = 0 
Now, using the formula of total variance, 
Total variance = variance of market + variance due to exchange rate 
Variance due to exchange rate = (standard deviation of exchange rate)^2
Variance of market = (standard deviation of return to Canadian investors)^2
Therefore, 
(standard deviation of return to Canadian investors)^2 = (standard deviation of market)^2 + (standard deviation of exchange rate)^2 - 2 * covariance 
= (24.8%)^2 + (30.2%)^2 - 2 * 0 
= 0.153 
Standard deviation of return to Canadian investors = sqrt(0.153) = 0.391

Question 11

In an economist's perfect world with no barriers to the free flow of goods and capital, multinational corporations can create value for investors by diversifying internationally.

Accepted Answer

No value is created because investors are able to diversify their own portfolios.

Question 12

The future benefits of risk reduction through international portfolio diversification can be estimated fairly precisely using historical data.

Accepted Answer

Expected returns, variances, and covariances vary considerably over time.

Question 13

A stock in India rises 20% in local terms. The Indian rupee rises 25% against the U.K. pound sterling. What is the return in pound sterling?

Accepted Answer

The total return in pound sterling is calculated by adjusting the stock's local return for the currency exchange rate change. If the stock rises 20% in local terms and the Indian rupee rises 25% against the pound, the combined effect is a multiplication of the two returns (1 + 0.20) * (1 + 0.25) = 1.2 * 1.25 = 1.5, which is a 50% return in pound sterling terms.

Question 14

Which of a) through c) is FALSE?

Accepted Answer

A) is true because in a diversified portfolio, the risk of an individual asset is indeed determined by its covariance with other assets, reflecting how its returns move in relation to the returns of other assets in the portfolio. B) is false because as the number of assets in a portfolio increases, the individual asset variances become less significant, and it's the covariance terms that matter for understanding how the assets interact with each other, but they do not dominate in the sense of increasing risk; rather, they help in understanding the diversification effect. C) is true because the benefit of diversification, in terms of risk reduction, is highly dependent on the correlation between the assets; lower correlation between the assets leads to greater risk reduction.

Question 15

Frictionless financial markets could have which of the following?

Accepted Answer

In frictionless financial markets, there are no transaction costs, and information is freely available, meaning there would be no agency costs, bid-ask spreads, brokerage fees, or government intervention affecting transactions. However, the presence of irrational investors does not contradict the concept of a frictionless market, as their existence doesn't inherently introduce frictions into financial transactions.

Question 16

Return variance on a portfolio with many assets depends more on the variances of the individual assets in the portfolio than on the covariances between the individual assets.

Accepted Answer

It is more dependent on the covariances.

Question 17

A stock in India rises 20% in local terms. Pound sterling rises 25% against the Indian rupee. What is the return in pound sterling?

Accepted Answer

The return in pound sterling can be calculated by adjusting the local return by the currency movement. If a stock rises by 20% in local terms (India), it becomes 1.20 times its original value. If the pound sterling rises 25% against the Indian rupee, it means that the rupee has depreciated, and you need fewer pounds to buy the same amount of rupees. To adjust the local return into pounds, you divide the local return by the change in currency value: 1.20 / 1.25 = 0.96, which means the value in pounds is 96% of the original, indicating a 4% decrease, or -4%.

Question 18

The return-risk efficiency of an internationally diversified portfolio of stocks and bonds can be improved by hedging the currency risk of foreign investments.

Accepted Answer

Hedging the currency risk of foreign investments can reduce volatility and increase the predictability of returns, thus improving the return-risk efficiency of the portfolio.

Question 19

What is the variance on the Indian (Rp = rupee) stock market to a Canadian investor if Var(r^Rp) = 0.105, Var(s^C£/Rp) = 0.088, and the local Indian stock market is independent of the value of the rupee?

Accepted Answer

The variance for a Canadian investor considering the Indian stock market would be the sum of the variance of the Indian stock market returns and the variance of the exchange rate, since they are independent. Therefore, Var(r^C) = Var(r^Rp) + Var(s^C£/Rp) = 0.105 + 0.088 = 0.193.

Question 20

Empirical evidence suggests that stock return volatility varies predictably over time.

Accepted Answer

There is empirical evidence that suggests that stock return volatility is not constant over time and can vary predictably. For example, there may be seasonal patterns or economic cycles that affect volatility. Additionally, historical volatility can be used to predict future volatility.

Quiz 19: International Portfolio Diversification

Correlations between national stock markets are fairly stable over time.

The benefits of international diversification are limited by the lack of _______ in foreign markets.

The correlation between returns on companies in the same industry and domiciled in the same country is usually greater than the correlation between returns on companies in the same industry but in different countries.

The perfect market assumptions include each of the following EXCEPT

The extent to which risk is reduced by portfolio diversification does not depend on the correlations between assets in the portfolio.

Suppose E[r_A] = 14.8%, $\sigma$ _A = 17.9%, E[r_B] = 17.1%, and $\sigma$ _B = 31.9%. Assuming a mean-variance framework, which of the following statements is true?

Which of the following conditions is sufficient to ensure an operationally efficient market?

You live in New York and buy a share of Phillips at a price of 166 euros. At the end of the year, you receive a dividend of 4 euros and the stock price is 160 euros. If the euro appreciates by 8% during the year, what was your percentage return in dollars for the year?

In an economist's perfect world with no barriers to the free flow of goods and capital, multinational corporations can create value for investors by diversifying internationally.

The future benefits of risk reduction through international portfolio diversification can be estimated fairly precisely using historical data.

A stock in India rises 20% in local terms. The Indian rupee rises 25% against the U.K. pound sterling. What is the return in pound sterling?

Which of a) through c) is FALSE?

Frictionless financial markets could have which of the following?

Return variance on a portfolio with many assets depends more on the variances of the individual assets in the portfolio than on the covariances between the individual assets.

A stock in India rises 20% in local terms. Pound sterling rises 25% against the Indian rupee. What is the return in pound sterling?

The return-risk efficiency of an internationally diversified portfolio of stocks and bonds can be improved by hedging the currency risk of foreign investments.

What is the variance on the Indian (Rp = rupee) stock market to a Canadian investor if Var(r^Rp) = 0.105, Var(s^C£/Rp) = 0.088, and the local Indian stock market is independent of the value of the rupee?

Empirical evidence suggests that stock return volatility varies predictably over time.

Quiz 19: International Portfolio Diversification

Correlations between national stock markets are fairly stable over time.

The benefits of international diversification are limited by the lack of _______ in foreign markets.

The correlation between returns on companies in the same industry and domiciled in the same country is usually greater than the correlation between returns on companies in the same industry but in different countries.

The perfect market assumptions include each of the following EXCEPT

The extent to which risk is reduced by portfolio diversification does not depend on the correlations between assets in the portfolio.

Suppose E[rA] = 14.8%, σ\sigmaσ A = 17.9%, E[rB] = 17.1%, and σ\sigmaσ B = 31.9%. Assuming a mean-variance framework, which of the following statements is true?

Which of the following conditions is sufficient to ensure an operationally efficient market?

You live in New York and buy a share of Phillips at a price of 166 euros. At the end of the year, you receive a dividend of 4 euros and the stock price is 160 euros. If the euro appreciates by 8% during the year, what was your percentage return in dollars for the year?

In an economist's perfect world with no barriers to the free flow of goods and capital, multinational corporations can create value for investors by diversifying internationally.

The future benefits of risk reduction through international portfolio diversification can be estimated fairly precisely using historical data.

A stock in India rises 20% in local terms. The Indian rupee rises 25% against the U.K. pound sterling. What is the return in pound sterling?

Which of a) through c) is FALSE?

Frictionless financial markets could have which of the following?

Return variance on a portfolio with many assets depends more on the variances of the individual assets in the portfolio than on the covariances between the individual assets.

A stock in India rises 20% in local terms. Pound sterling rises 25% against the Indian rupee. What is the return in pound sterling?

The return-risk efficiency of an internationally diversified portfolio of stocks and bonds can be improved by hedging the currency risk of foreign investments.

What is the variance on the Indian (Rp = rupee) stock market to a Canadian investor if Var(rRp) = 0.105, Var(sC£/Rp) = 0.088, and the local Indian stock market is independent of the value of the rupee?

Empirical evidence suggests that stock return volatility varies predictably over time.

Suppose E[r_A] = 14.8%, $\sigma$ _A = 17.9%, E[r_B] = 17.1%, and $\sigma$ _B = 31.9%. Assuming a mean-variance framework, which of the following statements is true?

What is the variance on the Indian (Rp = rupee) stock market to a Canadian investor if Var(r^Rp) = 0.105, Var(s^C£/Rp) = 0.088, and the local Indian stock market is independent of the value of the rupee?