Question 1

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

Accepted Answer

A) inflation risk perceptions by different investors in different countries will differ as consumption baskets differ. 
B) investors in different countries view exchange rate risk from the perspective of different domestic currencies. 
C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world index portfolio. 
D) All of the options 
E) None of the options 
A) inflation risk perceptions by different investors in different countries will differ as consumption baskets differ. 
B) investors in different countries view exchange rate risk from the perspective of different domestic currencies. 
C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world index portfolio. 
D) All of the options 
E) None of the options

Question 2

International investing

Accepted Answer

A) cannot be measured against a passive benchmark, such as the S&P 500. 
B) can be measured against a widely used index of non-U.S.stocks, the EAFE Index (Europe, Australia, Far East). 
C) can be measured against international indexes. 
D) can be measured against a widely used index of non-U.S.stocks, the EAFE Index (Europe, Australia, Far East) and against international indexes. 
E) None of the options 
A) cannot be measured against a passive benchmark, such as the S&P 500. 
B) can be measured against a widely used index of non-U.S.stocks, the EAFE Index (Europe, Australia, Far East). 
C) can be measured against international indexes. 
D) can be measured against a widely used index of non-U.S.stocks, the EAFE Index (Europe, Australia, Far East) and against international indexes. 
E) None of the options

Question 3

The emerging market country with the lowest average local-currency equity-market excess return between 2002-2011 is

Accepted Answer

A) Taiwan. 
B) Colombia. 
C) Poland. 
D) Turkey. 
A) Taiwan. 
B) Colombia. 
C) Poland. 
D) Turkey.

Question 4

Home bias refers to

Accepted Answer

A) the tendency to vacation in your home country instead of traveling abroad. 
B) the tendency to believe that your home country is better than other countries. 
C) the tendency to give preferential treatment to people from your home country. 
D) the tendency to overweight investments in your home country. 
E) None of the options 
A) the tendency to vacation in your home country instead of traveling abroad. 
B) the tendency to believe that your home country is better than other countries. 
C) the tendency to give preferential treatment to people from your home country. 
D) the tendency to overweight investments in your home country. 
E) None of the options

Question 5

You are a U.S.investor who purchased British securities for 2,000 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 2,400 pounds and the pound is worth $1.60.

Accepted Answer

A) 16.7% 
B) 20.0% 
C) 28.0% 
D) 40.0% 
E) None of the options 
A) 16.7% 
B) 20.0% 
C) 28.0% 
D) 40.0% 
E) None of the options

Question 6

U.S.investors

Accepted Answer

A) can trade derivative securities based on prices in foreign security markets. 
B) cannot trade foreign derivative securities. 
C) can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K.and European stocks. 
D) can trade derivative securities based on prices in foreign security markets and can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K.and European stocks. 
E) None of the options 
A) can trade derivative securities based on prices in foreign security markets. 
B) cannot trade foreign derivative securities. 
C) can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K.and European stocks. 
D) can trade derivative securities based on prices in foreign security markets and can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K.and European stocks. 
E) None of the options

Question 7

The emerging market country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is

Accepted Answer

A) China. 
B) Russia. 
C) Poland. 
D) Taiwan. 
A) China. 
B) Russia. 
C) Poland. 
D) Taiwan.

Question 8

The __________ equity market had the lowest average U.S.dollar excess return between 2002-2011.

Accepted Answer

A) Russian 
B) Finnish 
C) Colombian 
D) Greece 
A) Russian 
B) Finnish 
C) Colombian 
D) Greece

Question 9

The __________ equity market had the highest average U.S.dollar excess return between 2002-2011.

Accepted Answer

A) Russian 
B) Finnish 
C) Colombian 
D) U.S. 
A) Russian 
B) Finnish 
C) Colombian 
D) U.S.

Question 10

Marla holds her portfolio 100% in U.S.securities.She tells you that she believes foreign investing can be extremely hazardous to her portfolio.She's not sure about the details, but has "heard some things." Discuss this idea with Marla by listing three objections you have heard from your clients who have similar fears.Explain each of the objections is subject to faulty reasoning.

Accepted Answer

A few of the factors students may mentio

Question 11

When an investor adds international stocks to her U.S.stock portfolio

Accepted Answer

A) it will raise her risk relative to the risk she would face just holding U.S.stocks. 
B) she can reduce the risk of her portfolio. 
C) she will increase her expected return, but must also take on more risk. 
D) it will have no impact on either the risk or the return of her portfolio. 
E) she needs to seek professional management because she doesn't have access to international investments on her own. 
A) it will raise her risk relative to the risk she would face just holding U.S.stocks. 
B) she can reduce the risk of her portfolio. 
C) she will increase her expected return, but must also take on more risk. 
D) it will have no impact on either the risk or the return of her portfolio. 
E) she needs to seek professional management because she doesn't have access to international investments on her own.

Question 12

The __________ equity market had the highest average local currency standard deviation of excess returns between 2002-2011.

Accepted Answer

A) Turkish 
B) Argentina 
C) Indonesian 
D) U.S. 
A) Turkish 
B) Argentina 
C) Indonesian 
D) U.S.

Question 13

The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows:   Calculate Quantitative's country selection return contribution.

Accepted Answer

A) 12.5% 
B) -12.5% 
C) 11.25% 
D) -1.25% 
E) 1.25% 
A) 12.5% 
B) -12.5% 
C) 11.25% 
D) -1.25% 
E) 1.25%

Question 14

Investors looking for effective international diversification should

Accepted Answer

A) invest about 60% of their money in foreign stocks. 
B) invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market. 
C) frequently hedge currency exposure. 
D) invest about 60% of their money in foreign stocks and invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market. 
E) None of the options 
A) invest about 60% of their money in foreign stocks. 
B) invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market. 
C) frequently hedge currency exposure. 
D) invest about 60% of their money in foreign stocks and invest the same percentage of their money in foreign stocks that foreign equities represent in the world equity market. 
E) None of the options

Question 15

The interest rate on a 1-year Canadian security is 8%.The current exchange rate is C$ = US $0.78.The 1-year forward rate is C$ = US $0.76.The return (denominated in U.S.$) that a U.S.investor can earn by investing in the Canadian security is

Accepted Answer

A) 3.59%. 
B) 4.00%. 
C) 5.23%. 
D) 8.46%. 
E) None of the options 
A) 3.59%. 
B) 4.00%. 
C) 5.23%. 
D) 8.46%. 
E) None of the options

Question 16

The yield on a 1-year bill in the U.K.is 8%, and the present exchange rate is 1 pound = U.S.$1.60.If you expect the exchange rate to be 1 pound = U.S.$1.50 a year from now, the return a U.S.investor can expect to earn by investing in U.K.bills is

Accepted Answer

A) -6.7%. 
B) 0%. 
C) 8%. 
D) 1.25%. 
E) None of the options 
A) -6.7%. 
B) 0%. 
C) 8%. 
D) 1.25%. 
E) None of the options

Question 17

The __________ equity market had the highest average U.S.dollar standard deviation of excess returns between 2002-2011.

Accepted Answer

A) Turkish 
B) Finnish 
C) Indonesian 
D) U.S. 
A) Turkish 
B) Finnish 
C) Indonesian 
D) U.S.

Question 18

The emerging market country with the highest average U.S.dollar equity-market excess return between 2002-2011 is

Accepted Answer

A) China. 
B) Colombia. 
C) Poland. 
D) Turkey. 
A) China. 
B) Colombia. 
C) Poland. 
D) Turkey.

Question 19

You are managing a portfolio that consists of U.S.equities.You have prepared a presentation to use when you discuss the possibility of adding international stocks to your client's portfolio.
- Draw a graph that shows the risk of the portfolio relative to the number of stocks held in the portfolio.
- When your client arrives, he is surprised at your suggestion that he add international stocks, but is willing to listen to your statements to justify your recommendations.State two reasons why he should consider the international stocks and briefly explain each.

Accepted Answer

The graph should look like the one that

Question 20

The developed country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is

Accepted Answer

A) Japan. 
B) Korea. 
C) Austria. 
D) Greece. 
A) Japan. 
B) Korea. 
C) Austria. 
D) Greece.

Exam 25: International Diversification

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

International investing

The emerging market country with the lowest average local-currency equity-market excess return between 2002-2011 is

Home bias refers to

U.S.investors

The emerging market country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is

The __________ equity market had the lowest average U.S.dollar excess return between 2002-2011.

The __________ equity market had the highest average U.S.dollar excess return between 2002-2011.

When an investor adds international stocks to her U.S.stock portfolio

The __________ equity market had the highest average local currency standard deviation of excess returns between 2002-2011.

The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's country selection return contribution.

Investors looking for effective international diversification should

The interest rate on a 1-year Canadian security is 8%.The current exchange rate is C$ = US $0.78.The 1-year forward rate is C$ = US $0.76.The return (denominated in U.S.$) that a U.S.investor can earn by investing in the Canadian security is

The yield on a 1-year bill in the U.K.is 8%, and the present exchange rate is 1 pound = U.S.$1.60.If you expect the exchange rate to be 1 pound = U.S.$1.50 a year from now, the return a U.S.investor can expect to earn by investing in U.K.bills is

The __________ equity market had the highest average U.S.dollar standard deviation of excess returns between 2002-2011.

The emerging market country with the highest average U.S.dollar equity-market excess return between 2002-2011 is

The developed country with the lowest average U.S.dollar equity-market excess return between 2002-2011 is

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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