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60) Hedge fund advisors typically receive a "2-plus-twenty" management fee
A) meaning 2 percent per year of the assets under management, plus performance fee 20 percent of
any capital appreciation.
B) meaning 2 percent per year of the assets under management, plus performance fee 20 basis
points.
C) meaning 2 percent per year of the assets under management, plus performance fee of 20 percent
of the excess return.
D) meaning 2 percent per year of the assets under management, plus performance fee 20 percent of
gross return net of the risk-free rate.
61) Hedge funds
A) 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 options
62) Explanations for Home Bias include
A) 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 options
63) When a country is more remote, with an uncommon language
A) 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) domestic investors tend to invest more in country's market and less abroad, and foreign
investors tend to invest less in country's market.
64) The degree of home bias varies across investors
A) 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) none of the options
65) Current research suggests that
A) 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.
66) The return and variance of return to a U.S. dollar investor from investing in individual foreign
security i are given by:
A) Ri$ = (1 + Ri)(1 + ei) − 1 and Var(Ri$) = Var(Ri)
B) Ri$ = Ri + ei and Var(Ri$) = Var(Ri) + Var(ei)
C) Ri$ = (1 + Ri)(1 + ei) – 1 and Var(Ri$) = Var(Ri) + Var(ei) + 2Cov(Ri, ei)
D) none of the options
67) If the investor hedges the exchange rate risk when investing internationally
A) the risk-return efficiency is likely to be superior.
B) the expected return to the U.S. dollar investor is approximately the same whether the investor
hedges the exchange rate risk in the investment, or remains unhedged.
C) to the extent that the investor establishes an effective hedge to eliminate exchange rate
uncertainty, the risk will be reduced.
D) all of the options
68) Consider a simple exchange risk hedging strategy in which the U.S. dollar based investor sells
the expected foreign currency proceeds of a risky investment forward. Although the expected
foreign investment proceeds will be converted into U.S. dollars at the known forward exchange
rate under this strategy, the unexpected foreign investment proceeds
A) will have to be converted into U.S. dollars at the uncertain forward spot exchange rate.
B) will have to be converted into U.S. dollars at the uncertain future spot exchange rate.
C) will have to be converted into U.S. dollars at the uncertain swap exchange rate.
D) none of the options
69) You invested $100,000 in British equities. The stock's price was £50 and the exchange rate was
£0.50/$1.00. At selling time, one year after purchase, they were £45 and £0.60/$1.00. Assume the
investor 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) 1.09 percent
C) 28.00 percent
D) −9.09 percent
70) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54
the exchange rate has changed from €1.25 per pound to €1.30 per pound.
71) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock using 50 percent margin. One year after investment, the stock pays a £1
dividend, and sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per
pound. The interest on the margin loan is 1 percent per year. The margin loan was denominated in
pounds.
72) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. The stock pays a £0.30 quarterly dividend, and after one year the
investment sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per pound.
73) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock on margin with only 40 percent down and 60 percent borrowed. The stock
pays a £0.30 quarterly dividend, and after one year the investment sells for £54 the exchange rate
has changed from €1.25 per pound to €1.30 per pound. The interest on the margin loan is 1 percent
per year. The margin loan is denominated in pounds.
74) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54
the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £8,800
forward at the forward rate of €1.28 per pound.
75) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54
the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £10,000
forward at the forward rate of €1.28 per pound.
76) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock has no value since the firm is
bankrupt. Meanwhile the exchange rate has changed from €1.25 per pound to €1.30 per pound, and
he sold £8,000 forward at the forward rate of €1.28 per pound.
77) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock. One year after investment, the stock pays a $1 dividend, and sells for
$54 the exchange rate has changed from €0.625 per dollar to €0.6875 per dollar.
78) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock using 50 percent margin. One year after investment, the stock pays a $1
dividend, and sells for $54 the exchange has changed from €0.625 per dollar to €0.6875 per dollar.
The interest on the margin loan is 1 percent per year. The margin loan was denominated in dollars.
79) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock. The stock pays a $0.30 quarterly dividend, and after one year the
investment sells for $54 the exchange has changed from €0.625 per dollar to €0.6875 per dollar.
80) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock on margin with only 40 percent down and 60 percent borrowed. The
stock pays a $0.30 quarterly dividend, and after one year the investment sells for $54 the exchange
has changed from €0.625 per dollar to €0.6875 per dollar. The interest on the margin loan is 1
percent per year. The margin loan is denominated in dollars.
81) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock. One year after investment, the stock pays a £1 dividend, and sells for
$54 the exchange has changed from €0.625 per dollar to €0.6875 per dollar, although he sold
$17,600 forward at the forward rate of €0.65 per dollar.
82) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock. One year after investment, the stock pays a $1 dividend, and sells for
$54 the exchange rate has changed from €0.625 per dollar to €0.6875 per dollar, although he sold
$16,000 forward at the forward rate of €0.65 per dollar.
83) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a $50 American stock. One year after investment, the stock has no value since the firm is
bankrupt. Meanwhile the exchange rate has changed from €0.625 per dollar to €0.6875 per dollar,
and he sold $16,000 forward at the forward rate of €0.65 per dollar.
84) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54.
Spot exchange rates at the start and end of the year are shown in the table.
T = 0
T = 1
Euro
1.60
1.60
Pound
2.00
2.08
85) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock using 50 percent margin. One year after investment, the stock pays a £1
dividend, and sells for £54. The interest on the margin loan is 1 percent per year. The margin loan
was denominated in pounds.
T = 0
T = 1
Euro
1.60
1.60
Pound
2.00
2.08
86) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. The stock pays a £0.30 quarterly dividend, and after one year the
investment sells for £54.
T = 0
T = 1
Euro
1.60
1.60
Pound
2.00
2.08
87) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock on margin with only 40 percent down and 60 percent borrowed. The stock
pays a £0.30 quarterly dividend, and after one year the investment sells for £54. The interest on the
margin loan is 1 percent per year. The margin loan is denominated in pounds.
Spot exchange rates at the start and end of the year are shown in the table.
T = 0
T = 1
Euro
1.60
1.60
Pound
2.00
2.08
88) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54
the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £8,800
forward at the forward rate of €1.28 per pound.
Spot exchange rates at the start and end of the year are shown in the table.
Spot Rate T = 0
Spot Rate T = 1
Forward Rate
Euro
$
1.60
$
1.60
$
1.625
Pound
$
2.00
$
2.08
$
2.08
89) Calculate the euro-based return an Italian investor would have realized by investing €10,000
into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54
the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £10,000
forward at the forward rate of €1.28 per pound.
Spot exchange rates at the start and end of the year are shown in the table.
Spot Rate T = 0
Spot Rate T = 1
Forward Rate
Euro
$
1.60
$
1.60
$
1.625
Pound
$
2.00
$
2.08
$
2.08
90) The stock market of country A has an expected return of 5 percent, and standard deviation of
expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and standard deviation of expected return of 10 percent.
Find the expected return of a portfolio with half invested in A and half invested in B.
91) The stock market of country A has an expected return of 5 percent, and standard deviation of
expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and standard deviation of expected return of 10 percent.
Assume that the correlation of expected return between A and B is negative 1. Calculate the
standard deviation of expected return of the portfolio in the last question.
92) The stock market of country A has an expected return of 5 percent, and standard deviation of
expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and standard deviation of expected return of 10 percent.
Is it reasonable to conclude that your portfolio is on the efficient frontier? If not, then prove your
point by finding just one portfolio weighting between A and B that offers more return with less
risk. If you think it is on the efficient frontier, why do you think this?
93) The stock market of country A has an expected return of 5 percent, and standard deviation of
expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and standard deviation of expected return of 10 percent.
Find the Global Minimum Variance Portfolio.
94) The stock market of country A has an expected return of 8 percent, and standard deviation of
expected return of 5 percent. The stock market of country B has an expected return of 16 percent
and standard deviation of expected return of 10 percent.
Find the expected return of a portfolio with half invested in A and half invested in B.
95) The stock market of country A has an expected return of 8 percent, and standard deviation of
expected return of 5 percent. The stock market of country B has an expected return of 16 percent
and standard deviation of expected return of 10 percent.
Assume that the correlation of expected return between A and B is negative 1. Calculate the
standard deviation of expected return of the portfolio in the last question.
96) The stock market of country A has an expected return of 8 percent, and standard deviation of
expected return of 5 percent. The stock market of country B has an expected return of 16 percent
and standard deviation of expected return of 10 percent.
Assume that the correlation of expected return between A and B is negative 1.
Is it reasonable to conclude that your portfolio is on the efficient frontier? If not, then prove your
point by finding just one portfolio weighting between A and B that offers more return with less
risk. If you think it is on the efficient frontier, why do you think this?
97) The stock market of country A has an expected return of 8 percent, and standard deviation of
expected return of 5 percent. The stock market of country B has an expected return of 16 percent
and standard deviation of expected return of 10 percent.
Find the Global Minimum Variance Portfolio.
98) The stock market of country A has an expected return of 5 percent, and a standard deviation of
expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and a standard deviation of expected return of 10 percent.
Calculate the expected return of a portfolio that is half invested in A and half in B.
99) The stock market of country A has an expected return of 5 percent, and a standard deviation of
expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and a standard deviation of expected return of 10 percent.
Assume that the correlation of expected return between security A and B is 0.2. Calculate the
standard deviation of expected return of a portfolio that has half of its money invested in A and half
in B.
100) The stock market of country A has an expected return of 5 percent, and a standard deviation
of expected return of 8 percent. The stock market of country B has an expected return of 15 percent
and a standard deviation of expected return of 10 percent.
Is it reasonable to conclude that your portfolio is on the efficient frontier? If not, then prove your
point by finding just one portfolio weighting between A and B that offers more return with less
risk. If you think it is on the efficient frontier, why do you think this? Either way, your answer
should include verification.
