10) Refer to Instruction 13.1. 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?
A) -1.35%
B) 5.0%
C) -5.0%
D) -7.24%
11) 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?
A) 22.00%
B) 23.12%
C) 6.00%
D) 4.88%
12) Which of the following statements is NOT 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.
13) International CAPM (ICAPM) assumes that there is a global market in which the firm’s
equity trades, and estimates of the firm’s beta, and the market risk premium, must then reflect
this global portfolio.
14) Use of the International CAPM (ICAPM) assures that the WACC will be lower than if a
purely domestic market portfolio had been used in the estimation of the cost of equity.
15) A global portfolio is an index of all the securities in the world, whereas a world portfolio
represents those securities actually available to an investor.
16) The CAPM has now become very widely accepted in global business as the preferred
method of calculating the cost of equity for a firm. As a result of this, there is now little debate
over what numerical values should be used in its application.
17) The geometric mean will, in all but a few extreme circumstances, yield a larger return than
the arithmetic mean return.
18) Portfolio diversification can eliminate 100% of risk.
19) Increasing the number of securities in a portfolio reduces the unsystematic risk but not the
systematic risk.
20) International diversification benefits may induce investors to demand foreign securities.
21) If the addition of a foreign security to the portfolio of the investor aids in the reduction of
risk for a given level of return, then the security adds value to the portfolio.
22) If the addition of a foreign security to the portfolio of the investor decreases the expected
return for a given level of risk, then the security adds value to the portfolio.
23) One of the elegant beauties of international equity markets is that over the last 100 or so
years, the average market risk premium is almost identical across major industrial countries.
24) There are potential benefits and risks from raising capital on global markets. Discuss the pros
and cons in terms of risk of raising capital on global markets.
Answer: A portfolio of international stocks represents a portfolio in which foreign securities
have been added. It has the same overall risk shape as the U.S. stock portfolio, but it has a lower
portfolio beta. This means that the international portfolio’s market risk is lower than that of a
13.3 The Demand for Foreign Securities: The Role of International Portfolio Investors
1) The primary goal of both domestic and international portfolio managers is:
A) to maximize return for a given level of risk, or to minimize risk for a given level of return.
B) to minimize the number of unique securities held in their portfolio.
C) to maximize their WACC.
D) all of the above
2) Which of the following is NOT a portfolio diversification technique used by portfolio
managers?
A) diversify by type of security
B) diversify by the size of capitalization of the securities held
C) diversify by country
D) All of the above are diversification techniques.
3) If all capital markets are fully integrated, securities of comparable expected return and risk
should have the same required rate of return in each national market after adjusting for:
A) time of day and language requirements.
B) political risk and time lags.
C) foreign exchange risk and political risk.
D) foreign exchange risk and the spot rate.
4) Capital market segmentation is a financial market imperfection caused mainly by:
A) government constraints.
B) institutional practices.
C) investor perceptions.
D) all of the above
5) Capital market imperfections leading to financial market segmentation include:
A) asymmetric information between domestic and foreign-based investors.
B) high securities transaction costs.
C) foreign exchange risks.
D) all of the above
6) Capital market imperfections leading to financial market segmentation include:
A) political risks.
B) corporate governance differences.
C) regulatory barriers.
D) all of the above
7) The authors refer to companies that have access to a ________ as MNEs, and firms without
such access are identified as ________.
A) global cost and availability of capital; domestic firms.
B) large domestic capital market; geographically challenged.
C) world financial markets; antiquated.
D) none of the above
8) The MNE can ________ its ________ by gaining access to markets that are more liquid
and/or less segmented than its own.
A) increase; MCC.
B) decrease; MCC.
C) maintain; MRR.
D) none of the above
9) Portfolio theory assumes that investors are risk-averse. This means that investors:
A) cannot be induced to make risky investments.
B) prefer more risk to less for a given return.
C) will accept some risk, but not unnecessary risk.
D) All of the above are true.
10) The optimal capital budget:
A) occurs where the marginal cost of capital equals the marginal rate of return of the opportunity
set of projects.
B) is typically larger for purely domestic firms than for MNEs.
C) is an illusion found only in international finance textbooks.
D) none of the above