Question 1

The portfolio with the least risk among all those possible in the domestic portfolio opportunity set is called the minimum risk domestic portfolio.

Accepted Answer

This statement is true. The portfolio with the least risk among all possible options in the domestic portfolio opportunity set is referred to as the minimum risk domestic portfolio.

Question 2

Instruction 16.2:Use the information to answer the following question(s).
A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds.
-Refer to Instruction 16.2. What is the expected return of the proposed portfolio?

Accepted Answer

To calculate the expected return of the portfolio, we need to apply the formula:
Expected return of portfolio = Weight of security A x Expected return of security A + Weight of security B x Expected return of security B
So, plugging in the given values, we get:
Expected return of portfolio = (0.6 x 10%) + (0.4 x 8%)
Expected return of portfolio = 6% + 3.2%
Expected return of portfolio = 9.2%

Question 3

Capital markets around the world are on average less integrated today than they were 20 years ago.

Accepted Answer

Comment: Capital markets around the world are on average MORE integrated today than they were 20 years ago.

Question 4

The standard deviation of a portfolio is the sum of the weighted average standard deviations of the individual assets.

Accepted Answer

Comment: The standard deviation of a portfolio can be found in the Internationalizing the Domestic Portfolio section of the text.

Question 5

In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002)determined that the equity returns in the United States out-performed the other 15 countries in the study.

Accepted Answer

The study by Dimson, Marsh, and Staunton (2002) found that the United States had strong equity returns, but it did not outperform all other countries in the study. Some countries had higher returns during certain periods.

Question 6

Of the major trading partners with the United States, Canada has among the LOWEST correlation of returns with the U.S.

Accepted Answer

Canada is one of the United States' largest trading partners, and their economies are closely linked, resulting in a high correlation of returns between the two countries.

Question 7

In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002)found that just under one-half of the 16 countries in the study had negative average returns in their equity markets.

Accepted Answer

The answer of In an empirical study on national market...

Question 8

The graph for the efficient frontier has beta on the vertical axis and standard deviation of the horizontal axis.

Accepted Answer

Comment: The graph for the efficient frontier has EXPECTED RETURN on the vertical axis and standard deviation of the horizontal axis.

Question 9

Draw the curve representing the Optimal Domestic Efficient Frontier. Be sure to draw and label the following: The vertical axis and the horizontal axis, the risk-free security, the minimum risk portfolio, the domestic portfolio opportunity set, the optimal domestic portfolio, and the capital market line. Choose a point along the domestic portfolio opportunity set between the optimal domestic portfolio and the minimum risk domestic portfolio and explain why that point is not the optimal risky domestic portfolio for investors to hold.

Accepted Answer

The answer of Draw the curve representing the Optimal Domestic...

Question 10

The internationally diversified portfolio opportunity set shifts TO THE RIGHT of the purely domestic opportunity set.

Accepted Answer

The answer of The internationally diversified portfolio opportunity set shifts...

Question 11

The ________ connects the risk-free security with the optimal domestic portfolio.

Accepted Answer

The Capital Market Line (CML) is a line that connects the risk-free asset with the optimal portfolio that consists of risky assets. It shows the trade-off between risk and return for efficient portfolios with different levels of risk. The CML is derived from the Capital Asset Pricing Model (CAPM), which is a model that describes the relationship between risk and expected return. However, the Security Market Line (SML) is a line that shows the expected return of an asset given its systematic risk, as measured by beta, according to the CAPM. Therefore, the most appropriate answer is C, Capital Market Line.

Question 12

The authors present a comparison of correlation coefficients between major global equity markets over a variety of different periods. The comparison yields a number of conclusions listed here EXCEPT:

Accepted Answer

The question states that all of the conclusions listed are true, so none of them are inaccurate.

Question 13

The optimal domestic portfolio of risky securities is always the portfolio of minimum risk.

Accepted Answer

Comment: The optimal domestic portfolio of risky securities is THE MARKET PORTFOLIO, or the point on the CML that extends from the risk-free rate to the point of tangency along the domestic efficient frontier.

Question 14

The efficient frontier of the domestic portfolio opportunity set:

Accepted Answer

The efficient frontier represents portfolios that offer the highest expected return for a given level of risk, or the lowest risk for a given level of expected return. It runs along the extreme left edge of the opportunity set and contains the optimal portfolios that a rational investor would choose.

Question 15

In an empirical study on national market returns in the 20th century, Dimson, Marsh, and Staunton (2002)determined that due to high levels of correlation or returns between countries, there is almost NO BENEFIT to international portfolio diversification.

Accepted Answer

Dimson, Marsh, and Staunton (2002) actually found evidence in support of international portfolio diversification, despite high levels of correlation between countries' market returns. They found that adding international assets to a portfolio can reduce risk and increase returns.

Question 16

Instruction 16.2:Use the information to answer the following question(s).
A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds.
-Refer to Instruction 16.2. What is the standard deviation of the proposed portfolio?

Accepted Answer

The standard deviation of the portfolio is calculated using the formula for the standard deviation of a two-asset portfolio: √[(w₁σ₁)² + (w₂σ₂)² + 2w₁w₂σ₁σ₂ρ], where w₁ and w₂ are the weights, σ₁ and σ₂ are the standard deviations, and ρ is the correlation coefficient. Plugging in the values: √[(0.6*0.2)² + (0.4*0.18)² + 2*0.6*0.4*0.2*0.18*0.15] = 14.45%.

Question 17

The optimal domestic portfolio combines the risk-free asset and a portfolio of domestic securities found on the efficient frontier.

Accepted Answer

The optimal domestic portfolio is a combination of the risk-free asset and a portfolio of domestic securities that lies on the efficient frontier. By combining the risk-free asset with a portfolio on the efficient frontier, an investor can achieve a risk-return tradeoff that is superior to that of any other combination of assets. Hence, the statement is true.

Question 18

Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is located ________ the efficient frontier.

Accepted Answer

A portfolio cannot be to the left of the efficient frontier because that would imply a higher return for the same level of risk, which is not possible according to the principles of modern portfolio theory.

Question 19

The addition of foreign securities to the domestic portfolio opportunity set shifts the efficient frontier:

Accepted Answer

The addition of foreign securities to the domestic portfolio opportunity set increases the diversity of the portfolio, which tends to increase returns for a given level of risk. This shift the efficient frontier up and to the left, providing better portfolio options for investors.

Question 20

If an investor is able to determine a global beta for his portfolio and holds a portfolio that is well-diversified with international investments, which performance measure is more appropriate, the Sharpe Measure or the Treynor Measure? Why? Explain each performance measure.

Accepted Answer

The answer of If an investor is able to determine...

Quiz 16: International Portfolio Theory and Diversification