Question 1

Which of the following is a potential obstacle to international diversification of portfolios?

Accepted Answer

A)  high transaction costs 
B)  higher information costs 
C)  both A and B 
D)  none of the above 
A)  high transaction costs 
B)  higher information costs 
C)  both A and B 
D)  none of the above

Question 2

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

A) True 
 B)False

Question 3

Portfolio diversification is beneficial to the investor because it

Accepted Answer

A)  reduces expected returns and increases risk. 
B)  increases expected returns. 
C)  reduces risk for given levels of return. 
D)  none of the above. 
A)  reduces expected returns and increases risk. 
B)  increases expected returns. 
C)  reduces risk for given levels of return. 
D)  none of the above.

Question 4

The construction of an internationally diversified portfolio combines

Accepted Answer

A)  currency and asset risk and return. 
B)  country risk with currency return. 
C)  credit risk with inflation risk. 
D)  asset risk with sovereign risk. 
A)  currency and asset risk and return. 
B)  country risk with currency return. 
C)  credit risk with inflation risk. 
D)  asset risk with sovereign risk.

Question 5

The international diversification of a portfolio

Accepted Answer

A)  results in lower diversifiable risk of the portfolio. 
B)  decreases the currency risk component of the portfolio. 
C)  reduces the systematic risk component of the portfolio. 
D)  none of the above. 
A)  results in lower diversifiable risk of the portfolio. 
B)  decreases the currency risk component of the portfolio. 
C)  reduces the systematic risk component of the portfolio. 
D)  none of the above.

Question 6

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. How many euros will the U.S. investor acquire with his initial $500,000 investment?

Accepted Answer

A)  euro 650,000 
B)  euro 370,370 
C)  euro 500,000 
D)  euro 384,615 
A)  euro 650,000 
B)  euro 370,370 
C)  euro 500,000 
D)  euro 384,615

Question 7

Meryl Janicky, a mutual fund manager, is evaluating the recent performance of the shares of Thames Boats International, a publicly traded company in Great Britain. Ms Janicky's firm has $200,000 invested in Thames Boats and she has gathered the information presented in the following table. What was the return on the security in dollars?

Accepted Answer

A)  7.47% 
B)  10.50% 
C)  12.07% 
D)  16.66% 
A)  7.47% 
B)  10.50% 
C)  12.07% 
D)  16.66%

Question 8

The correlation of returns of the U.S. equity market index with the indexes of equity markets in seventeen other countries over the period 1977-1996 is between

Accepted Answer

A)  -1 and -0.50. 
B)  1 and 0.50. 
C)  -0.50 and 0.0. 
D)  0.0 and 0.50. 
A)  -1 and -0.50. 
B)  1 and 0.50. 
C)  -0.50 and 0.0. 
D)  0.0 and 0.50.

Question 9

The standard deviation of the risk-free security is

Accepted Answer

A)  less than the standard deviation of the optimal risky domestic portfolio. 
B)  less than the standard deviation of the optimal international portfolio. 
C)  is equal to zero. 
D)  all of the above. 
A)  less than the standard deviation of the optimal risky domestic portfolio. 
B)  less than the standard deviation of the optimal international portfolio. 
C)  is equal to zero. 
D)  all of the above.

Question 10

TABLE 16.1
Use the information to answer following question(s).
  
-Refer to Table 16.1. What is the value of the Sharpe Measure for France?

Accepted Answer

A)  0.113 
B)  0.0071 
C)  Either A or B 
D)  Neither A nor B 
A)  0.113 
B)  0.0071 
C)  Either A or B 
D)  Neither A nor B

Question 11

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 graph should look like that found on

Question 12

The Treynor Measure of portfolio performance calculates the average return of the portfolio above that of the

Accepted Answer

A)  market, per unit of portfolio risk. 
B)  risk-free rate, per unit of beta. 
C)  none of the above. 
A)  market, per unit of portfolio risk. 
B)  risk-free rate, per unit of beta. 
C)  none of the above.

Question 13

A well-diversified portfolio is only about ________ as risky as the typical individual stock.

Accepted Answer

A)  8% 
B)  19% 
C)  27% 
D)  52% 
A)  8% 
B)  19% 
C)  27% 
D)  52%

Question 14

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 an average price of euro 60/share, how many shares of stock will the investor be able to purchase?

Accepted Answer

A)  8333 shares 
B)  6410 shares 
C)  6173 shares 
D)  10,833 shares 
A)  8333 shares 
B)  6410 shares 
C)  6173 shares 
D)  10,833 shares

Question 15

The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses ________ as the measure of risk.

Accepted Answer

A)  standard deviation; variance 
B)  beta; variance 
C)  standard deviation; beta 
D)  beta; standard deviation 
A)  standard deviation; variance 
B)  beta; variance 
C)  standard deviation; beta 
D)  beta; standard deviation

Question 16

Portfolio theory assumes that investors are risk-averse. This means that investors

Accepted Answer

A)  cannot be induced to make risky investments. 
B)  prefer more risk to less for a given return. 
C)  will accept some risk, but not unnecessary risk. 
D)  All of the above are true. 
A)  cannot be induced to make risky investments. 
B)  prefer more risk to less for a given return. 
C)  will accept some risk, but not unnecessary risk. 
D)  All of the above are true.

Question 17

The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when the portfolios

Accepted Answer

A)  are poorly diversified. 
B)  are properly diversified. 
C)  contain only U.S. equity investments. 
D)  none of the above. 
A)  are poorly diversified. 
B)  are properly diversified. 
C)  contain only U.S. equity investments. 
D)  none of the above.

Question 18

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

A)  9.2% 
B)  9.0% 
C)  19.2% 
D)  19% 
A)  9.2% 
B)  9.0% 
C)  19.2% 
D)  19%

Which of the following is a potential obstacle to international diversification of portfolios?

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

Portfolio diversification is beneficial to the investor because it

The construction of an internationally diversified portfolio combines

The international diversification of a portfolio

The correlation of returns of the U.S. equity market index with the indexes of equity markets in seventeen other countries over the period 1977-1996 is between

The standard deviation of the risk-free security is

TABLE 16.1 Use the information to answer following question(s). -Refer to Table 16.1. What is the value of the Sharpe Measure for France?

The Treynor Measure of portfolio performance calculates the average return of the portfolio above that of the

A well-diversified portfolio is only about ________ as risky as the typical individual stock.

The Sharpe measure uses as the measure of risk and the Treynor measure uses as the measure of risk.

Portfolio theory assumes that investors are risk-averse. This means that investors

The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when the portfolios

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

Which of the following is a potential obstacle to international diversification of portfolios?

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

Portfolio diversification is beneficial to the investor because it

The construction of an internationally diversified portfolio combines

The international diversification of a portfolio

The correlation of returns of the U.S. equity market index with the indexes of equity markets in seventeen other countries over the period 1977-1996 is between

The standard deviation of the risk-free security is

TABLE 16.1 Use the information to answer following question(s). -Refer to Table 16.1. What is the value of the Sharpe Measure for France?

The Treynor Measure of portfolio performance calculates the average return of the portfolio above that of the

A well-diversified portfolio is only about ________ as risky as the typical individual stock.

The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses ________ as the measure of risk.

Portfolio theory assumes that investors are risk-averse. This means that investors

The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when the portfolios

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

The Sharpe measure uses as the measure of risk and the Treynor measure uses as the measure of risk.