International Financial Management, 8e (Eun)
1) Under the investment dollar premium system,
A) U.K. residents received a premium over the prevailing commercial exchange rate when they
sold foreign securities and repatriated the funds to the U.K.
B) U.K. residents had to pay a premium over the prevailing commercial exchange rate when they
bought foreign currencies to invest in foreign securities.
C) none of the options
2) Foreign equities as a proportion of U.S. investors’ portfolio wealth rose from about 1 percent in
the early 1980s to about ________ by 2015.
A) 10 percent
B) 27 percent
C) 33 percent
D) 67 percent
3) In the context of investments in securities (stocks and bonds), portfolio risk diversification
refers to
A) 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 and
positively correlated.
C) the fact that the less correlated the securities in a portfolio, the lower the portfolio risk.
D) all of the options
4) In the graph at shown, X and Y represent
A) U.S. stocks and international stocks.
B) international stocks and U.S. stocks.
C) systematic risk and unsystematic risk.
D) none of the options
5) You will get more diversification
A) across industries than across countries.
B) across countries than across industries.
C) across stocks and bonds than across countries.
D) none of the options
6) Systematic risk is
A) non-diversifiable risk.
B) the risk that remains even after investors fully diversify their portfolio holdings.
C) non-diversifiable risk and the risk that remains even after investors fully diversify their
portfolio holdings.
D) none of the options
7) The “world beta” measures the
A) unsystematic risk.
B) sensitivity of returns on a security to world market movements.
C) risk-adjusted performance.
D) risk of default and bankruptcy.
8) 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.
9) 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 options
10) Systematic risk
A) 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 options
11) A fully diversified U.S. portfolio is about
A) 75 percent as risky as a typical individual stock.
B) 27 percent as risky as a typical individual stock.
C) 12 percent as risky as a typical individual stock.
D) half as risky as a fully diversified international portfolio.
12) Studies show that international stock markets tend to move more closely together when the
volatility is higher. This finding suggests that
A) 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 options
13) The “Sharpe performance measure” (SHP) is
A) 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) a “risk-adjusted” performance measure, as well as the excess return (above and beyond the
risk-free interest rate) per standard deviation risk.
14) 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) the German stock market is the most sensitive to world market movements, and the Swiss stock
market is the least sensitive to world market movements.
D) none of the options
15) The “Sharpe performance measure” (SHP) is
A) SHP =
B) SHP =
C) SHP = – +
D) none of the options
16) The mean and standard deviation (SD) of monthly returns, over a given period of time, for the
stock markets of two countries, X and Y are:
Country
Mean(%)
SD(%)
X
1.57
4.87
Y
1.92
7.64
Assuming that the monthly risk-free interest rate is 0.25 percent, the Sharpe performance
measures, SHP(X) and SHP(Y), and the performance ranks, respectively, for X and Y are:
A) SHP(X) = 0.271, rank = 1, and SHP(Y) = 0.219, rank = 2.
B) SHP(X) = 0.271, rank = 2, and SHP(Y) = 0.219, rank = 1.
C) SHP(X) = 18.84, rank = 1, and SHP(Y) = 23.04, rank = 2.
D) SHP(X) = 23.04, rank = 2, and SHP(Y) = 18.84, rank = 1.
17) With regard to the OIP,
A) the composition of the optimal international portfolio is identical for all investors, regardless of
home country.
B) the composition of the optimal international portfolio are varies depending upon the numeraire
currency used to measure returns.
C) the composition of the optimal international portfolio is identical for all investors, regardless of
home country, if they hedge their risk with currency futures contracts.
D) the composition of the optimal international portfolio are varies depending upon the numeraire
currency used to measure returns, and the composition of the optimal international portfolio is
identical for all investors (regardless of home country) if they hedge their risk with currency
futures contracts.
18) With regard to the OIP,
A) the composition of the optimal international portfolio is identical for all investors, regardless of
home country.
B) the OIP has more return and less risk for all investors, regardless of home country.
C) the composition of the optimal international portfolio is identical for all investors, regardless of
home country, if they hedge their risk with currency futures contracts.
D) none of the options
19) With regard to the OIP,
A) the composition of the optimal international portfolio is identical for all investors, regardless of
home country.
B) the OIP has more return and less risk for all investors, regardless of home country.
C) the composition of the optimal international portfolio is identical for all investors of a particular
country, whether or not they hedge their risk with currency futures contracts.
D) none of the options
20) With regard to the OIP,
A) the optimal international portfolio contains investments from every country.
B) the OIP has more return and less risk for all investors.
C) the composition of the optimal international portfolio changes according to IRP.
D) none of the options
21) 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 percent
B) 20.00 percent
C) 1.28 percent
D) 28.00 percent
22) 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 percent
B) 9.25 percent
C) 8 percent
D) There is not enough information to compute the investor’s annual percentage rate of return in
terms of the U.S. dollars.
23) 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 percent
B) −1 percent
C) 0 percent
D) There is not enough information to compute the investor’s annual percentage rate of return in
terms of the U.S. dollars.
24) Bema Gold is an exploration and production company that trades on the Toronto stock
exchange. Assume that when purchased by an international investor the stock’s price and the
exchange rate were CAD5 and CAD1.0/USD0.72 respectively. At selling time, one year after the
purchase date, they were CAD6 and CAD1.0/USD1.0. Calculate the investor’s annual percentage
rate of return in terms of the U.S. dollars.
A) −13.60 percent
B) 66.67 percent
C) 38.89 percent
D) 28.00 percent
25) The realized dollar returns for a U.S. resident investing in a foreign market will depend on the
return in the foreign market as well as on the exchange rate fluctuations between the dollar and the
foreign currency.
Calculate the variance of the monthly rate of return in dollar terms, if the variance of the foreign
market’s return (in terms of its own currency) is 1.14, the variance between the U.S. dollar and the
foreign currency is 17.64, the covariance is 2.34, and the contribution of the cross-product term is
0.04.
A) 21.16
B) 23.50
C) 26.89
D) 28.65
26) 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 purchase, they
were £6 and £0.60/$1.00. If the investor had sold £5, the principal investment amount at the same
time that the stock was purchased, forward at the forward exchange rate of £0.60/$1.00. The dollar
rate of return would be
A) 0.26 percent.
B) 26.00 percent.
C) 28.00 percent.
D) 30.00 percent.
27) Bema Gold is an exploration and production company that trades on the Toronto stock
exchange. Assume that when purchased by an international investor the stock’s price and the
exchange rate were CAD5 and CAD1.0/USD0.72 respectively. At selling time, one year after the
purchase date, they were CAD6 and CAD1.0/USD1.0. Calculate the investor’s annual percentage
rate of return in terms of the U.S. dollars if the investor had sold CAD5, the principal investment
amount at the same time that the stock was purchased, forward at the forward exchange rate of
CAD1/USD.80.
A) –13.60 percent
B) 66.67 percent
C) 38.89 percent
D) 28.00 percent
28) 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 £60 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) 10.90 percent.
B) 7.58 percent.
C) 28.00 percent.
D) 9.09 percent.
29) 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 percent.
B) −17.42 percent.
C) 28.00 percent.
D) −9.09 percent.
30) 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. If the investor had sold ¥10,000,000 forward at the
forward exchange rate of ¥105/$1.00 the dollar rate of return would be
A) −27.27 percent.
B) 4.33 percent.
C) 28.00 percent.
D) −9.09 percent.
31) 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 percent.
B) 4.32 percent.
C) 28 percent.
D) −9.09 percent.
32) 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 percent
B) 16.25 percent
C) 28.00 percent
D) −9.09 percent
33) 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. How much of the return is due to the exchange rate
movement?
A) 3.75 percent
B) 3.33 percent
C) 12.50 percent
D) 16.25 percent
34) Which of the following is a true statement?
A) Generally, exchange rate volatility is greater than bond market volatility.
B) When investing in international bonds, it is essential to control exchange risk to enhance the
efficiency of international bond portfolios.
C) The real-world evidence suggests that investing in Swiss bonds largely amounts to investing in
Swiss currency.
D) all of the options
35) Compared with bond markets
A) the risk of investing in foreign stock markets is, to a lesser degree, attributable to exchange rate
uncertainty.
B) the risk of investing in foreign stock markets is, to a much greater degree, attributable to
exchange rate uncertainty.
C) exchange risk is lower than default risk and interest rate risk.
D) all of the options
36) Exchange rate fluctuations contribute to the risk of foreign investment through three possible
channels
(i) the volatility of the investment due to the volatility of the exchange rate
(ii) the contribution of the cross-product term
(iii) its covariance with the local market returns
Which of the following contributes and accounts for most of the volatility?
A) (i) and (ii)
B) (ii) and (iii)
C) (i) and (iii)
D) only (ii)
37) 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 percent in terms of yen, calculate the dollar amount that the bonds were
sold at.
A) $10,618,000
B) $10,720,000
C) $14,600,000
D) none of the options
38) A zero-coupon British bond promises to pay £100,000 in five years. The current exchange rate
is $2.00 = £1.00 and inflation is forecast at 3 percent in the U.S. and 2 percent in the U.K. per year
for the next five years. The appropriate discount rate for a bond of this risk would be 10 percent if
it paid in dollars. What is the appropriate price of the bond?
A) £62,092.13 = $124,184.26
B) £65,196.13 = $130,392.26
C) £60,000 = $120,000
D) none of the options
39) A zero-coupon French bond promises to pay €100,000 in five years. The current exchange rate
is $1.50 = €1.00 and inflation is forecast at 3 percent in the U.S. and 2 percent in the euro zone per
year for the next five years. The appropriate discount rate for a bond of this risk would be 10
percent if it paid in dollars. What is the appropriate price of the bond?
A) £65,196.13 = $97,794.20
B) £62,092.13 = $93,183.20
C) none of the options
40) A 5 percent-annual coupon British has a par value of £1,000, matures in five years, and has a
yield to maturity of 4 percent. The current exchange rate is $2.00 = £1.00 and inflation is forecast
at 3 percent in the U.S. and 2 percent in the U.K. per year for the next five years. If a dollar-based
investor used forward contracts to redenominate this bond into dollars, what would be his rate of
return?
A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent
41) A zero-coupon Japanese bond promises to pay ¥1,200,000 in five years. The current exchange
rate is $1.00 = ¥100 and inflation is forecast at 3 percent in the U.S. and 2 percent in Japan per year
for the next five years. The appropriate discount rate for a bond of this risk would be 10 percent if
it paid in dollars. What is the appropriate price of the bond?
A) ¥782,353.60 = $7,823.54
B) ¥745,105.60 = $7,451.06
C) none of the options
42) 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 can be completely hedged.
D) they can substantially enhance the efficiency of international bond and stock portfolios.
43) Recent studies show that when investors control exchange risk by using currency forward
contracts to hedge,
A) international bond portfolios outperform domestic bond portfolios.
B) international bond portfolios dominate domestic stock portfolios in terms of risk-return
efficiency.
C) international bond portfolios outperform domestic bond portfolios, and also dominate domestic
stock portfolios in terms of risk-return efficiency.
D) none of the options
44) Advantages of investing in U.S.-based international mutual funds include
A) 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 options
45) 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 options
46) The record of investing in U.S.-based international mutual funds
A) shows that most funds have a beta much less than one.
B) shows them to be a raging arbitrage opportunity.
C) shows that they offer less diversification benefits than just investing in U.S.-based MNCs.
D) none of the options
47) 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 options
48) The record of investing in U.S.-based stock mutual funds
A) shows that the movements of the U.S. stock market account for about 20 percent of the
fluctuations of the value of U.S.-based stock mutual funds.
B) shows that the talent of individual portfolio managers accounts for about 90 percent of the
fluctuations of the value of U.S.-based stock mutual funds—luck the other ten percent.
C) shows that the movements of the U.S. stock market account for about 90 percent of the
fluctuations of the value of U.S.-based stock mutual funds.
D) none of the options
49) 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 options
50) Advantages of investing in mutual funds known as country funds include
A) speculation in a single foreign market at minimum cost.
B) using them as building blocks of a personal international portfolio.
C) diversification into emerging markets that are otherwise practically inaccessible.
D) all of the options
51) A closed-end mutual fund
A) invests in bonds of a particular maturity, when they mature, the fund closes.
B) trades on a stock exchange just like a publicly traded corporation.
C) always trades at Net Asset Value.
D) all of the options
52) With regard to the past price performance of closed-end mutual funds
A) most funds have traded at both a premium and a discount to NAV.
B) most funds trade on a stock exchange just like a publicly traded corporation.
C) suggests the risk-return characteristics can be quite different from those of the securities
underlying the fund.
D) all of the options
53) With regard to the past price performance of U.S.-based closed-end country funds,
A) most CECFs behave more like U.S. securities than their corresponding NAVs.
B) most CECFs have track records nearly identical to their currency returns.
C) most CECFs have stock betas of around zero when measured against the S&P 500.
D) none of the options
54) With regard to the past performance of U.S.-based closed-end country funds
A) most investors who can invest directly in foreign markets without incurring excessive costs are
advised to do so.
B) NAVs offer superior diversification opportunities compared to the CECFs.
C) most investors who can invest directly in foreign markets without incurring excessive costs are
advised to do so, and NAVs offer superior diversification opportunities compared to the CECFs.
D) none of the options
55) The majority of ADRS
A) are from such developed countries as Australia and Japan.
B) are from developing nations.
C) are from emerging markets.
D) are from both developing nations and emerging markets.
56) American Depository Receipt (ADRs) represent foreign stocks
A) 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.
57) WEBS are
A) World Equity Benchmark Shares.
B) exchange-traded open-end country funds designed to closely track foreign stock market
indexes.
C) World Equity Benchmark Shares, and may be described as exchange-traded open-end country
funds designed to closely track foreign stock market indexes.
D) none of the options
58) For those investors who desire international equity exposure, WEBS
A) 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 options
59) Hedge fund advisors typically receive a management fee, often ________ of the fund asset
value as compensation, plus performance fee that can be 20-25 percent of capital appreciation.
A) 1 to 2 percent
B) 10 to 20 basis points
C) 10 percent
D) none of the options