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Exam 25: International Diversification

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Question 1

Multiple Choice

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Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

A) 1.6037
B) 2.0411
C) 1.7500
D) 2.3369

E) B) and C)
F) C) and D)

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Question 2

Multiple Choice

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__________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.

A) Default risk
B) Foreign exchange risk
C) Market risk
D) Political risk
E) None of the options are correct.

F) B) and C)
G) All of the above

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Question 3

Multiple Choice

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Suppose the 1-year risk-free rate of return in the U.S. is 6%. The current exchange rate is 1 pound = U.S. $1.62. The 1-year forward rate is 1 pound = $1.53. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

__________ are mutual funds that invest in one country only.

The __________ index is a widely used index of non-U.S. stocks.

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be

You are a U.S. investor who purchased British securities for 2,200 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 2,560 pounds and the pound is worth $1.60.

WEBS portfolios

Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.76. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make an investor indifferent between investing in the U.S. bill and the Canadian bill.

Using local currency returns, the S&P 500 has the highest correlation with

The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: $\begin{array}{c}\begin{array}{lll} \text { } \\ \text { } \\ \text { } \\ \text { Eur } \\ \text {Aus } \\ \text {FE } \\\end{array}\begin{array}{c} \text { } \\ \text { } \\ \text { EAFE Welght } \\ \text { 0.30 } \\ \text { 0.10} \\ \text { 0.60} \\\end{array}\begin{array}{c} \text { } \\ \text { Return on } \\ \text {Equity Index } \\10\%\\5\%\\15\%\end{array}\begin{array}{c} \text {Currency } \\ \text {Aplication } \\ E_{1} / E_{0.1} \\10\%\\-10\%\\30\%\end{array}\begin{array}{c} \text { } \\ \text { Quantitative's } \\ \text { Welght} \\0.25\\0.25\\0.50\end{array}\begin{array}{c} \text { } \\ \text { } \\ \text {Manager's Return } \\9\%\\8\%\\16\%\end{array}\end{array}$ Calculate Quantitative's currency selection return contribution.

Shares of several foreign firms are traded in the U.S. markets in the form of

Using the S&P 500 portfolio as a proxy of the market portfolio

The straightforward generalization of the simple CAPM to international stocks is problematic because

The major concern that has been raised with respect to the weighting of countries within the EAFE index is

According to PRS, in 2015, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky) ?

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be

You are a U.S. investor who purchased British securities for 4,000 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,400 pounds and the pound is worth $1.62.

Suppose the 1-year risk-free rate of return in the U.S. is 4% and the 1-year risk-free rate of return in Britain is 6%. The current exchange rate is 1 pound = U.S. $1.67. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.