Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

In some respects, internationally diversified portfolios are different from a domestic portfolio because

Accepted Answer

A)  investors may also acquire foreign exchange risk. 
B)  international portfolio diversification increases expected return but does not decrease risk. 
C)  investors must leave the country to acquire foreign securities. 
D)  all of the above. 
A)  investors may also acquire foreign exchange risk. 
B)  international portfolio diversification increases expected return but does not decrease risk. 
C)  investors must leave the country to acquire foreign securities. 
D)  all of the above. A

Question 3

Inter-country correlations among the worlds largest capitalistic economies over the last century illustrate that the correlation results for the first 50 years were good predictors for correlations for the next 50 years.

Accepted Answer

A) True 
 B)False  False

Question 4

Instruction 16.1:
Use the information to answer following question(s).
In September 2002 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro.
-Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of euro 57. What is the investor's average rate of return after converting the stock back into dollars?

Accepted Answer

A)  -1.35% 
B)  5.0% 
C)  -5.0% 
D)  -7.24% 
A)  -1.35% 
B)  5.0% 
C)  -5.0% 
D)  -7.24%

Question 5

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

Accepted Answer

A)  22.00% 
B)  23.12% 
C)  6.00% 
D)  4.88% 
A)  22.00% 
B)  23.12% 
C)  6.00% 
D)  4.88%

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The efficient frontier for an international investor is

Accepted Answer

A)  not capable of being compared to that of a domestic investor unless currency risk has been eliminated. 
B)  greater than for a domestic investor. 
C)  maximized at the expected risk and return of the emerging market assets in the portfolio. 
D)  all of the above. 
A)  not capable of being compared to that of a domestic investor unless currency risk has been eliminated. 
B)  greater than for a domestic investor. 
C)  maximized at the expected risk and return of the emerging market assets in the portfolio. 
D)  all of the above.

Question 8

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

Accepted Answer

A)  security market line 
B)  capital asset pricing model 
C)  capital market line 
D)  none of the above 
A)  security market line 
B)  capital asset pricing model 
C)  capital market line 
D)  none of the above

Question 9

Your authors present a table showing mean returns across three classes of securities and across several countries. In general, the mean average annual returns for these classes of securities from highest to lowest are

Accepted Answer

A)  bonds, then equity, and finally bills. 
B)  bills, then bonds, and finally equity. 
C)  equity, then bonds, and finally bills. 
D)  equity, then bills, and finally bonds. 
A)  bonds, then equity, and finally bills. 
B)  bills, then bonds, and finally equity. 
C)  equity, then bonds, and finally bills. 
D)  equity, then bills, and finally bonds.

Question 10

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

Accepted Answer

A)  down and to the left. 
B)  up and to the right. 
C)  up and to the left. 
D)  down and to the right. 
A)  down and to the left. 
B)  up and to the right. 
C)  up and to the left. 
D)  down and to the right.

Question 11

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 Sharpe Measure is the ratio of exces

Question 12

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 standard deviation of the proposed portfolio?

Accepted Answer

A)  38.00 
B)  19.20 
C)  19.00 
D)  14.45 
A)  38.00 
B)  19.20 
C)  19.00 
D)  14.45

Question 13

Which of the following portfolios could not possibly be located on the efficient frontier of risky portfolios?

Accepted Answer

A)  Portfolio 1 with an expected return of 6% and a standard deviation of 6%. 
B)  Portfolio 2 with an expected return of 10% and a standard deviation of 12%. 
C)  Portfolio 3 with an expected return of 10% and a standard deviation of 8%. 
D)  Portfolio 4 with an expected return of 12% and a standard deviation of 20%. 
A)  Portfolio 1 with an expected return of 6% and a standard deviation of 6%. 
B)  Portfolio 2 with an expected return of 10% and a standard deviation of 12%. 
C)  Portfolio 3 with an expected return of 10% and a standard deviation of 8%. 
D)  Portfolio 4 with an expected return of 12% and a standard deviation of 20%.

Question 14

A fully diversified domestic portfolio has a beta of

Accepted Answer

A)  0.0. 
B)  1.0. 
C)  -1.0. 
D)  Not enough information to answer this question. 
A)  0.0. 
B)  1.0. 
C)  -1.0. 
D)  Not enough information to answer this question.

Question 15

Unsystematic risk is

Accepted Answer

A)  the remaining risk in a well-diversified portfolio. 
B)  measured with beta. 
C)  can be diversified away. 
D)  all of the above. 
A)  the remaining risk in a well-diversified portfolio. 
B)  measured with beta. 
C)  can be diversified away. 
D)  all of the above.

Question 16

In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because

Accepted Answer

A)  the investor is attempting to combine assets that are perfectly correlated. 
B)  investors are tying to reduce systematic risk. 
C)  investors are trying to reduce the total risk of the portfolio. 
D)  all of the above. 
A)  the investor is attempting to combine assets that are perfectly correlated. 
B)  investors are tying to reduce systematic risk. 
C)  investors are trying to reduce the total risk of the portfolio. 
D)  all of the above.

Question 17

An internationally diversified portfolio

Accepted Answer

A)  should result in a portfolio with a lower beta than a purely domestic portfolio. 
B)  has the same overall risk shape as a purely domestic portfolio. 
C)  is only about 12% as risky as the typical individual stock. 
D)  all of the above. 
A)  should result in a portfolio with a lower beta than a purely domestic portfolio. 
B)  has the same overall risk shape as a purely domestic portfolio. 
C)  is only about 12% as risky as the typical individual stock. 
D)  all of the above.

Question 18

TABLE 16.1
Use the information to answer following question(s).
  
-Refer to Table 16.1. ________ appears to have the greatest amount of risk as measured by monthly standard deviation, but ________ has the best return per unit of risk according to the Sharpe Measure.

Accepted Answer

A)  United States; Austria 
B)  France; Austria 
C)  United States; Netherlands 
D)  France; Netherlands 
A)  United States; Austria 
B)  France; Austria 
C)  United States; Netherlands 
D)  France; Netherlands

Question 19

According to the capital asset pricing model (CAPM), which of the following is true?

Accepted Answer

A)  The expected return on an asset is equal to the risk-free rate plus the amount of risk, beta, multiplied by the market risk premium. 
B)  The expected return on an asset is equal to the market rate plus the amount of risk, beta, multiplied by the market risk premium. 
C)  The expected return on an asset is equal to the risk-free rate plus the amount of risk, standard deviation, multiplied by the market risk premium. 
D)  None of the above. 
A)  The expected return on an asset is equal to the risk-free rate plus the amount of risk, beta, multiplied by the market risk premium. 
B)  The expected return on an asset is equal to the market rate plus the amount of risk, beta, multiplied by the market risk premium. 
C)  The expected return on an asset is equal to the risk-free rate plus the amount of risk, standard deviation, multiplied by the market risk premium. 
D)  None of the above.

Question 20

Portfolio diversification can eliminate 100% of risk.

Accepted Answer

A) True 
 B)False

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

In some respects, internationally diversified portfolios are different from a domestic portfolio because

Inter-country correlations among the worlds largest capitalistic economies over the last century illustrate that the correlation results for the first 50 years were good predictors for correlations for the next 50 years.

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

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

The efficient frontier for an international investor is

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

Your authors present a table showing mean returns across three classes of securities and across several countries. In general, the mean average annual returns for these classes of securities from highest to lowest are

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

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.

Which of the following portfolios could not possibly be located on the efficient frontier of risky portfolios?

A fully diversified domestic portfolio has a beta of

Unsystematic risk is

In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because

An internationally diversified portfolio

TABLE 16.1 Use the information to answer following question(s). -Refer to Table 16.1. appears to have the greatest amount of risk as measured by monthly standard deviation, but has the best return per unit of risk according to the Sharpe Measure.

According to the capital asset pricing model (CAPM), which of the following is true?

Portfolio diversification can eliminate 100% of risk.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

Exam 16: International Portfolio Theory and Diversification

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

In some respects, internationally diversified portfolios are different from a domestic portfolio because

Inter-country correlations among the worlds largest capitalistic economies over the last century illustrate that the correlation results for the first 50 years were good predictors for correlations for the next 50 years.

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

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

The efficient frontier for an international investor is

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

Your authors present a table showing mean returns across three classes of securities and across several countries. In general, the mean average annual returns for these classes of securities from highest to lowest are

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

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.

Which of the following portfolios could not possibly be located on the efficient frontier of risky portfolios?

A fully diversified domestic portfolio has a beta of

Unsystematic risk is

In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because

An internationally diversified portfolio

TABLE 16.1 Use the information to answer following question(s). -Refer to Table 16.1. ________ appears to have the greatest amount of risk as measured by monthly standard deviation, but ________ has the best return per unit of risk according to the Sharpe Measure.

According to the capital asset pricing model (CAPM), which of the following is true?

Portfolio diversification can eliminate 100% of risk.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

TABLE 16.1 Use the information to answer following question(s). -Refer to Table 16.1. appears to have the greatest amount of risk as measured by monthly standard deviation, but has the best return per unit of risk according to the Sharpe Measure.