Question 1

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Accepted Answer

A) True 
 B)False  True

Question 2

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 page 19.5. To answer the second part of the question, the student should draw a straight-line beginning at the point of the risk-free rate of return on the vertical axis and running through the point he/she just put on the opportunity set between the minimum risk portfolio and the optimal domestic portfolio. This graphical representation clearly shows that at any point other than holding 100% in the risk-free security, the expected risk and risk characteristics of the capital market line clearly dominate the new line just drawn.

Question 3

Beta may be defined as

Accepted Answer

A) the measure of systematic risk. 
B) a risk measure of a portfolio. 
C) the ratio of the variance of the portfolio to the variance of the market. 
D) all of the above 
A) the measure of systematic risk. 
B) a risk measure of a portfolio. 
C) the ratio of the variance of the portfolio to the variance of the market. 
D) all of the above D

Question 4

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 5

The efficient frontier of the domestic portfolio opportunity set

Accepted Answer

A) runs along the extreme left edge of the opportunity set. 
B) represents optimal portfolios of securities that represent minimum risk for a given level of expected portfolio return. 
C) contains the portfolio of risky securities that the logical investor would choose to hold. 
D) all of the above 
A) runs along the extreme left edge of the opportunity set. 
B) represents optimal portfolios of securities that represent minimum risk for a given level of expected portfolio return. 
C) contains the portfolio of risky securities that the logical investor would choose to hold. 
D) all of the above

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Unsystematic risk

Accepted Answer

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

Question 8

TABLE 17.1
Use the information to answer following question(s).  
-Refer to Table 17.1. 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 9

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

Accepted Answer

A) True 
 B)False

Question 10

TABLE 17.1
Use the information to answer following question(s).  
-Refer to Table 17.1. What is the value of the Treynor Measure for the Netherlands?

Accepted Answer

A) 0.197 
B) 0.0109 
C) either A or B 
D) neither A nor B 
A) 0.197 
B) 0.0109 
C) either A or B 
D) neither A nor B

Question 11

Use the information to answer the following question(s).
In September 2009 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 17.1. At the end of the year the investor sells his stock that now has an average price per share of €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 12

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 trying 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 trying to reduce systematic risk. 
C) investors are trying to reduce the total risk of the portfolio. 
D) all of the above

Question 13

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 14

Portfolio diversification can eliminate 100% of risk.

Accepted Answer

A) True 
 B)False

Question 15

TABLE 17.1
Use the information to answer following question(s).  
-Refer to Table 17.1. ________ 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 16

The Sharpe and Treynor measures are each measures of return per unit of risk.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is NOT true?

Accepted Answer

A) International diversification benefits induce investors to demand foreign securities. 
B) An international security adds value to a portfolio if it reduces risk without reducing return. 
C) Investors will demand a security that adds value. 
D) All of the above are true. 
A) International diversification benefits induce investors to demand foreign securities. 
B) An international security adds value to a portfolio if it reduces risk without reducing return. 
C) Investors will demand a security that adds value. 
D) All of the above are true.

Question 18

Use the information to answer the following question(s).
In September 2009 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 17.1. How many euros will the U.S. investor acquire with his initial $500,000 investment?

Accepted Answer

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

Question 19

A well-diversified portfolio has about ________ of the risk of the typical individual stock.

Accepted Answer

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

Question 20

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

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Beta may be defined as

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 efficient frontier of the domestic portfolio opportunity set

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

Unsystematic risk

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. What is the value of the Sharpe Measure for France?

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

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. What is the value of the Treynor Measure for the Netherlands?

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

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

Portfolio diversification can eliminate 100% of risk.

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. 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.

The Sharpe and Treynor measures are each measures of return per unit of risk.

Which of the following statements is NOT true?

A well-diversified portfolio has about ________ of the risk of the typical individual stock.

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

Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives

Interest Rate and Currency Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Operating Exposure

Translation Exposure

The Global Cost and Availability of Capital

Sourcing Equity Globally

Sourcing Debt Globally

Foreign Direct Investment Theory and Political Risk

Multinational Capital Budgeting

Multinational Tax Management

Working Capital Management

International Trade Finance

Filters

Exam 17: International Portfolio Theory and Diversification

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Beta may be defined as

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 efficient frontier of the domestic portfolio opportunity set

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

Unsystematic risk

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. What is the value of the Sharpe Measure for France?

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

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. What is the value of the Treynor Measure for the Netherlands?

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

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

Portfolio diversification can eliminate 100% of risk.

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. ________ 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.

The Sharpe and Treynor measures are each measures of return per unit of risk.

Which of the following statements is NOT true?

A well-diversified portfolio has about ________ of the risk of the typical individual stock.

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

Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives

Interest Rate and Currency Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Operating Exposure

Translation Exposure

The Global Cost and Availability of Capital

Sourcing Equity Globally

Sourcing Debt Globally

Foreign Direct Investment Theory and Political Risk

Multinational Capital Budgeting

Multinational Tax Management

Working Capital Management

International Trade Finance

Filters

TABLE 17.1 Use the information to answer following question(s). -Refer to Table 17.1. 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.