Exam 15: International Portfolio Investment

The stock market of country A has an expected return of 5%, and standard deviation of expected return of 8%. The stock market of country B has an expected return of 15% and standard deviation of expected return of 10%. Find the expected return of a portfolio with half invested in A and half invested in B.

Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests that

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a $50 American stock using 50% margin. One year after investment, the stock pays a $1 dividend, and sells for $54 the exchange has changed from €.625 per dollar to €.6875 per dollar. The interest on the margin loan is 1% per year. The margin loan was denominated in dollars.

Emerald Energy is an oil exploration and production company that trades on the London stock market. Assume that when purchased by an international investor the stock's price and the exchange rate were £5 and £0.64/$1.00 respectively. At selling time, one year after purchase, they were £6 and £0.60/$1.00. If the investor had sold £5, the principal investment amount at the same time that the stock was purchased, forward at the forward exchange rate of £0.60/$1.00. The dollar rate of return would be:

Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels: (i) - the volatility of the investment due to the volatility of the exchange rate (ii) - the contribution of the cross-product term (iii) - its covariance with the local market returns Which of the following contributes and accounts for most of the volatility?

Explanations for Home Bias include

Advantages of investing in U.S.-based international mutual funds include

Hedge funds

The stock market of country A has an expected return of 5%, and standard deviation of expected return of 8%. The stock market of country B has an expected return of 15% and standard deviation of expected return of 10%. Assume that the correlation of expected return between A and B is negative 1. Calculate the standard deviation of expected return of the portfolio in the last question.

The mean and standard deviation (SD) of monthly returns, over a given period of time, for the stock markets of two countries, X and Y are Assuming that the monthly risk-free interest rate is 0.25%, the Sharpe performance measures, SHP(X) and SHP(Y), and the performance ranks, respectively, for X and Y are:

Emerald Energy is an oil exploration and production company that trades on the London stock market. Assume that when purchased by an international investor the stock's price and the exchange rate were £5 and £0.64/$1.00 respectively. At selling time, one year after the purchase date, they were £6 and £0.60/$1.00. Calculate the investor's annual percentage rate of return in terms of the U.S. dollars.

The less correlated the securities in a portfolio,

If the investor hedges the exchange rate risk when investing internationally

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. The stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54. Spot exchange rates at the start and end of the year are shown in the table.

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £8,800 forward at the forward rate of €1.28 per pound. Spot exchange rates at the start and end of the year are shown in the table.

The stock market of country A has an expected return of 8%, and standard deviation of expected return of 5%. The stock market of country B has an expected return of 16% and standard deviation of expected return of 10%. Assume that the correlation of expected return between A and B is negative 1. Calculate the standard deviation of expected return of the portfolio in the last question.

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock on margin with only 40% down and 60% borrowed.The stock pays a £0.30 quarterly dividend, and after one year the investment sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per pound. The interest on the margin loan is 1% per year. The margin loan is denominated in pounds.

Compared with bond markets

Assume that you have invested $100,000 in British equities. When purchased, the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively. At selling time, one year after purchase, they were £60 and £0.60/$1.00. If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00. The dollar rate of return would be:

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock using 50% margin. One year after investment, the stock pays a £1 dividend, and sells for £54. The interest on the margin loan is 1% per year. The margin loan was denominated in pounds. Spot exchange rates at the start and end of the year are shown in the table.