Exam 19: International Diversification

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 currency selection return contribution.

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be

"ADRs" stands for ________, and "WEBS" stands for ________.

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.

The performance of an internationally-diversified portfolio may be affected by

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.

Suppose the 1-year risk-free rate of return in the U.S. is 2% and the 1-year risk-free rate of return in Mexico is 8%. The current exchange rate is 1 peso = U.S. $.051. A 1-year future exchange rate of ________ for the peso would make a U.S. investor indifferent between investing in the U.S. security and investing in the Mexican security.

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 stock selection return contribution.

International investing

Assume there is a fixed exchange rate between the Yen and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 21% and 15%, respectively. The expected return and standard deviation on the Japanese stock market are 13% and 12%, respectively. The covariance of returns between the U.S. and Japanese stock market is 2.5%. If you invested 60% of your money in the Japanese stock market and 40% in the U.S. stock market, the expected return on your portfolio would be

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

The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.76. The yield on a 1-year U.S. bill is 4%. A yield of ________ on a 1-year Canadian bill will make an investor indifferent between investing in the U.S. bill and the Canadian bill.

U.S. investors

The ________ index is a widely used index of non-U.S. stocks.

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

Using local currency returns, the S&P 500 has the highest correlation with

Exchange-rate risk

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be

As exchange rates change, they

Which country is the leader in GDP per capita?