International Finance Chapter 11

1 In the context of investments in securities (stocks and bonds), portfolio risk diversification refers toa) the time-honored adage “Don’t put all your eggs in one basket”.b) investors’ ability to reduce portfolio risk by holding securities that are less than perfectly positively correlated.c) the fact that the less correlated the securities in a portfolio, the lower the portfolio risk.d) all of the above D
2 You will get more diversificationa) across industries than across countries.b) across countries than across industries.c) across stocks and bonds than across countries.d) none of the above B
3 Systematic risk isa) Non-diversifiable risk.b) the risk that remains even after investors fully diversify their portfolio holdings.c) both a) and b)d) none of the above C
4 The “world beta” measures thea) unsystematic risk.b) sensitivity of returns on a security to world market movements.c) risk-adjusted performance.d) risk of default and bankruptcy. B
5 The less correlated the securities in a portfolio,a) the lower the portfolio risk.b) the higher the portfolio risk.c) the lower the unsystematic risk.d) the higher the diversifiable risk. A
6 Regarding the mechanics of international portfolio diversification, which statement is true?a) Security returns are much less correlated across countries than within a county.b) Security returns are more correlated across countries than within a county.c) Security returns are about as equally correlated across countries as they are within a county.d) None of the above A
7 Systematic riska) is also known as non-diversifiable risk.b) is market risk.c) refers to the risk that remains even after investors fully diversify their portfolio holdings.d) all of the above D
8 Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests thata) investors should liquidate their portfolio holdings during turbulent periods.b) since investors need risk diversification most precisely when markets are turbulent, there may be less benefit to international diversification for investors who liquidate their portfolio holdings during turbulent periods.c) this kind of correlation is why international portfolio diversification is smart for today’s investor.d) none of the above B
9 The “Sharpe performance measure” (SHP) isa) a “risk-adjusted” performance measure.b) the excess return (above and beyond the risk-free interest rate) per standard deviation risk.c) the sensitivity level of a national market to world market movements.d) both a) and b) D
10 With regard to estimates of “world beta” measures of the sensitivity of a national market to world market movements,a) the Japanese stock market is the most sensitive to world market movements.b) the U.S. stock market is the least sensitive to world market movements.c) both a) and b)d) none of the above C
11 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.a) 0.20%b) 20.00%c) 1.28%d) 28.00% D
12 Emerald Energy is an oil exploration and production company that trades on the London stock market. Over the past year, the stock has enjoyed a 20 percent return in pound terms, but over the same period, the exchange rate has fallen from $2.00 = £1 to $1.80 = £1. Calculate the investor’s annual percentage rate of return in terms of the U.S. dollars.a) 3.5%b) 9.25%c) 8%d) There is not enough information to compute the investor’s annual percentage rate of return in terms of the U.S. dollars. C
13 Emerald Energy is an oil exploration and production company that trades on the London stock market. Over the past year, the stock has gone from £50 per share to £55, but over the same period, the dollar has depreciated ten percent. Calculate the investor’s annual percentage rate of return in terms of the U.S. dollars.a) 3.5%b) -.01%c) 0%d) There is not enough information to compute the investor’s annual percentage rate of return in terms of the U.S. dollars. B
14 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 £45 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:a) -27.27%b) -17.42%c) 28.00%d) -9.09% B
15 Assume that you have invested $100,000 in Japanese equities. When purchased the stock’s price and the exchange rate were ¥100 and ¥100/$1.00 respectively. At selling time, one year after purchase, they were ¥110 and ¥110/$1.00. The dollar rate of return would be:a) 0%b) 4.32%%c) 28.00%d) -9.09% A
16 Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested €10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro. Compute the rate of return on your investment in euro terms. a) 12.50%b) 16.25%c) 28.00%d) -9.09% B
17 In May 1995 when the exchange rate was 80 yen per dollar, Japan Life Insurance Company invested ¥800,000,000 (i.e., $10,000,000) in pure-discount U.S. bonds. The investment was liquidated one year later when the exchange rate was 110 yen per dollar. If the rate of return earned on this investment was 46% in terms of yen, calculate the dollar amount that the bonds were sold at.a) $10,618,000b) $10,720,000c) $14,600,000d) none of the above A
18 Recent studies show that when investors control exchange risk by using currency forward contracts,a) they can substantially enhance the efficiency of international bond portfolios.b) they can substantially enhance the efficiency of international stock portfolios.c) the risk of investing in foreign stock markets is can be completely hedged.d) both a) and b) A
19 Advantages of investing in U.S.-based international mutual funds includea) lower transactions costs relative to direct investing.b) circumvention of many legal and institution barriers to direct portfolio investment in many foreign markets.c) professional management, potentially expertise in security selection, definitely record-keeping.d) all of the above D
20 The record of investing in U.S.-based international mutual funds a) suggests that it is a bad idea—the costs outweigh the benefits for U.S. investors.b) without exception, they have higher returns than the U.S. market (as proxied by the S&P 500 index) and slightly lower risk.c) suggests that for the most part, they have higher returns than the U.S. market (as proxied by the S&P 500 index) but with slightly higher risk.d) none of the above C
21 The record of investing in U.S.-based MNCs a) shows that the share prices of U.S.-based MNCs behave much like those of domestic firms, without providing effective international diversification.b) shows that the share prices of U.S.-based MNCs behave much differently than those of domestic firms, providing effective international diversification.c) shows that the share prices of U.S.-based MNCs behave much like the currency returns of their foreign markets.d) none of the above A
22 U.S.-based mutual funds known as country funds.a) Invest in the government securities of different sovereign governments, giving risk-free portfolios effective exchange rate diversification.b) Invests exclusively in stocks of a single country.c) Invests exclusively in government securities of a single country.d) None of the above B
23 Advantages of investing in mutual funds known as country funds include:a) Speculation in a single foreign market at minimum costb) Using them as building blocks of a personal international portfolio.c) Diversification into emerging markets that are otherwise practically inaccessibled) All of the above D
24 American Depository Receipt (ADRs) represent foreign stocksa) denominated in U.S. dollars that trade on European stock exchanges.b) denominated in U.S. dollars that trade on a U.S. stock exchange.c) denominated in a foreign currency that trade on a U.S. stock exchange.d) non-registered (bearer) securities . B
25 WEBS area) World Equity Benchmark Shares.b) exchange-traded open-end country funds designed to closely track foreign stock market indexes.c) both a) and b)d) none of the above C
26 For those investors who desire international equity exposure, WEBSa) may well serve as a major alternative to such traditional tools as international mutual funds, ADRs and closed-end country funds.b) are probably overpriced relative to international mutual funds, ADRs and closed-end country funds.c) would provide no international equity exposure since they are pools of bonds.d) none of the above A
27 Hedge fundsa) do not register as an investment company and are not subject to reporting or disclosure requirements.b) have experienced phenomenal growth in recent years.c) tend to have relatively low correlations with various stock market benchmarks.d) all of the above D
28 Explanations for Home Bias includea) domestic securities may provide investors with certain extra services, such as hedging against domestic inflation, that foreign securities do not.b) there may be barriers, for or informal, to investing in foreign securities.c) investors may face country-specific inflation in violation of PPP.d) all of the above D
29 When a country is more remote, with an uncommon languagea) domestic investors tend to invest more in country’s market and less abroad.b) foreign investors tend to invest less in country’s market.c) domestic investors tend to invest more in country’s market.d) both a) and b) D
30 The degree of home bias varies across investorsa) wealthier, more experienced, and sophisticated investors are less likely to exhibit home bias.b) wealthier, more experienced, and sophisticated investors are more likely to exhibit home bias.c) wealthier, more experienced, and sophisticated investors are less likely to invest in foreign securities.d) both b) and c) A
31 Current research suggests thata) investors can get more diversification with shares of domestic, large-cap stocks.b) investors can get more diversification with shares of domestic, small-cap stocks.c) investors can get more diversification with shares of foreign, large-cap stocks.d) investors can get more diversification with shares of foreign, small-cap stocks. D

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