Exam 17: International Portfolio Theory and Diversification

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 17.2. What is the standard deviation of the proposed portfolio?

Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is located ________ the efficient frontier.

An internationally diversified portfolio

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

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

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

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 before converting the stock back into dollars?

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.

The standard deviation of a portfolio is the weighted average standard deviations of the individual assets.

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

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

The graph for the efficient frontier has beta on the vertical axis and standard deviation of the horizontal axis.

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 17.2. What is the expected return of the proposed portfolio?

________ risk is measured with beta.

A fully diversified domestic portfolio has a beta of ________.