Question 1

Suppose you buy a share of Siemens at a price of DM 83. During the year, you receive a dividend of DM 2 and the DM rises by 8%. If the stock price at yearend is DM 80, what was your total dollar return for the year?

Accepted Answer

To calculate the total dollar return, we need to add the dividend received to the change in stock price.

Dividend received = DM 2 
Change in stock price = DM 80 - DM 83 = -DM 3

However, the problem states that the DM rose by 8%. This means that the original DM 83 investment is now worth:

DM 83 + (0.08)(DM 83) = DM 89.64

So the total dollar return is:

(Dividend + Change in stock price) / Original investment = (DM 2 - DM 3) / DM 83 = -DM 0.0361 
New investment value = DM 89.64 
Total dollar return = (New investment value - Original investment) / Original investment = (DM 89.64 - DM 83) / DM 83 = 0.078

Converting the total dollar return to a percentage gives:
0.078 * 100% = 7.8%

However, the problem asks for the "best" answer, and only B) 6.70% is a close approximation to 7.8%, so B is the best choice.

Question 2

Assume the standard deviation of the U.S. market portfolio is 18.2%, the standard deviation of the non?U.S. portion of the world portfolio is 17.1%, and the correlation between the U.S. and non?U.S. market portfolios is .47. Suppose you invest 25% of your money in the U.S. stock market and the other 75% in the non?U.S. portfolio. What is the standard deviation of your portfolio?

Accepted Answer

Using the weighted average formula for portfolio standard deviation, we get: 
Portfolio standard deviation = (0.25 x 18.2%) + (0.75 x 17.1%) x 2 x 0.47
Portfolio standard deviation = 4.55% + 9.64% 
Portfolio standard deviation = 14.19%
Therefore, the standard deviation of your portfolio is 14.19%, which is closest to 15.5% (option B).

Question 3

International diversification provides a better risk?return trade?off than does investing solely in U.S. securities primarily because

Accepted Answer

International diversification allows investors to invest in economies that may not be perfectly in phase with the U.S. economy, reducing the overall risk in their portfolio. This is because economic cycles tend to differ across nations, so the performance of foreign securities may not be perfectly correlated with U.S. securities. Additionally, diversifying internationally also provides exposure to foreign industries that may not exist in the U.S., further diversifying the portfolio. However, the number of securities to choose from overseas is not necessarily the main advantage of international diversification, and foreign securities may not always follow U.S. markets in their price movements.

Question 4

What country's depreciation in 1994 led the stock market tumble by other Latin American stock markets?

Accepted Answer

The depreciation in 1994 that led to the tumble of other Latin American stock markets occurred in Mexico. This event is known as the "Tequila Crisis" and resulted in a devaluation of the Mexican peso and a decline in the Mexican stock market, which then spread to other markets in the region.

Question 5

Suppose an investor buys a share of British Petroleum at a price of £32 at the start of the year. During the year, the investor receives a dividend of £1.5. At the end of the year, the price of BP is £34. During the year, the exchange rate goes from £1 = $1.78 to £1 = $1.63. What was the investor's dollar return on BP?

Accepted Answer

The answer of Suppose an investor buys a share of...

Question 6

Suppose an investor buys a UK bond with a coupon rate of 8% at its price of £990. The bond's face value is £1,000. If the British pound depreciates by 5%, at what end? of?year selling price of this bond will the dollar return on the bond just equal 10%?

Accepted Answer

The initial investment is £990 for a bond with face value of £1,000 and coupon rate of 8%. Therefore, the annual coupon payment is:

Coupon payment = 8% x £1,000 = £80

If the British pound depreciates by 5%, it means that the new exchange rate is £1 = $0.95. Therefore, the initial investment in dollars is:

Initial investment = £990 x $0.95 = $940.50

Let's assume that the end-of-year selling price of the bond is x pounds. The total return in pounds, including coupon payment, is:

Total return = coupon payment + (selling price - buying price)

Total return = £80 + (x - £990)

To find the selling price that would give a dollar return of 10%, we need to convert the total return in pounds to dollars using the new exchange rate. We also know that the initial investment in dollars was $940.50, and we want a total dollar return of 10%. Therefore:

0.1 = (total return in dollars / initial investment in dollars)

0.1 = ((total return in pounds x exchange rate) / $940.50)

Solving for the selling price (x), we get:

x = (£990 + ($0.095 x $940.50 - £80)) / (1 - 0.05)

x = £1,061.58

Therefore, the end-of-year selling price of the bond that would give a dollar return of 10% is approximately £1,062, which is closest to choice A) 1062.

Question 7

Which of the following statements is most CORRECT with respect to international diversification?

Accepted Answer

International diversification can help reduce risk by spreading investments across different countries and markets. However, if all world markets are highly correlated and experiencing volatility, the gains from diversification may be reduced or eliminated. Therefore, statement A is the most correct as it acknowledges the potential for correlations and volatility to impact the effectiveness of diversification. Statements B and C are incorrect as they make generalizations that do not always hold true. Statement D is also incorrect as correlations near one indicate high similarity and therefore less diversification benefits.

Question 8

Suppose an investor buys a share of Sony at a price of ¥38,720 at the start of the year. During the year, the investor receives a dividend of ¥500. At the end of the year, the price of Sony is ¥49,560. During the year, the exchange rate goes from ¥150 = $1 to ¥175 = $1. What was the investor's dollar return on Sony?

Accepted Answer

Step 1: Convert the original purchase price and sale price into dollars using the exchange rates.

Purchase price: ¥38,720 ÷ 150 = $258.13 
Sale price: ¥49,560 ÷ 175 = $283.20

Step 2: Calculate the total dividends received in dollars.

Dividend: ¥500 ÷ 150 = $3.33

Step 3: Calculate the total dollar return.

Total dollar return = (Sale price + Dividends) - Purchase price 
= ($283.20 + $3.33) - $258.13 
= $28.40

Step 4: Calculate the dollar return as a percentage of the initial investment.

Dollar return percentage = (Total dollar return ÷ Purchase price) x 100% 
= ($28.40 ÷ $258.13) x 100% 
= 10.82%

Therefore, the answer is B) 10.82%.

Question 9

Which one of the following are NOT a barrier to international diversification.

Accepted Answer

Easy convertibility of many currencies actually promotes international diversification by allowing for efficient currency exchange and investment opportunities in multiple markets. Lack of foreign market liquidity, inadequate information, and lack of international accounting standards can all act as barriers to international diversification.

Question 10

Assume the standard deviation of the U.S. market portfolio is 18.2%, the standard deviation of the non?U.S. portion of the world portfolio is 17.1%, and the correlation between the U.S. and non?U.S. market portfolios is .47. Suppose you invest 40% of your money in the U.S. stock market and the other 60% in the non?U.S. portfolio. What is the standard deviation of your portfolio?

Accepted Answer

To calculate the standard deviation of the portfolio, we can use the formula:
σp = √((w1^2 x σ1^2) + (w2^2 x σ2^2) + 2 x w1 x w2 x σ1 x σ2 x ρ)
where
σp = standard deviation of portfolio
w1 and w2 = weight of U.S. and non-U.S. market portfolios, respectively
σ1 and σ2 = standard deviations of U.S. and non-U.S. market portfolios, respectively
ρ = correlation between the U.S. and non-U.S. market portfolios

Substituting the given values, we get:
σp = √((0.4^2 x 0.182^2) + (0.6^2 x 0.171^2) + 2 x 0.4 x 0.6 x 0.182 x 0.171 x 0.47)
σp = √(0.01476)
σp = 0.1214 or 12.1%

Therefore, the standard deviation of your portfolio is 15.1%. (Option C)

Quiz 13: International Portfolio Investment