Essentials of Investments, 11e (Bodie)
Chapter 19 International Diversification
1) Shares of several foreign firms are traded in the U.S. markets in the form of
A) ADRs.
B) ECUs.
C) single-country funds.
D) All of the options are correct.
E) None of the options are correct.
2) ________ refers to the possibility of expropriation of assets, changes in tax policy, and the
possibility of restrictions on foreign exchange transactions.
A) Default risk
B) Foreign exchange risk
C) Market risk
D) Political risk
E) None of the options are correct.
3) ________ are mutual funds that invest in one country only.
A) ADRs
B) ECUs
C) Single-country funds
D) All of the options are correct.
E) None of the options are correct.
4) The performance of an internationally-diversified portfolio may be affected by
A) country selection.
B) currency selection.
C) stock selection.
D) All of the options are correct.
E) None of the options are correct.
5) Over the period 2011-2016, most correlations between the U.S. stock index and stock-index
portfolios of other countries were
A) negative.
B) positive but less than .9.
C) approximately zero.
D) .9 or above.
E) None of the options are correct.
6) The ________ index is a widely used index of non-U.S. stocks.
A) CBOE
B) Dow Jones
C) EAFE
D) All of the options are correct.
E) None of the options are correct.
7) According to PRS, in 2015, which country had the highest composite risk rating on a scale of
0 (most risky) to 100 (least risky)?
A) Switzerland
B) Canada
C) Germany
D) U.S.
8) Which country is the leader in GDP per capita?
A) Switzerland
B) Canada
C) Germany
D) U.S.
E) China
9) Which country has the largest stock market compared to GDP?
A) Japan
B) Germany
C) Hong Kong
D) U.S.
10) Using local currency returns, the S&P 500 has the highest correlation with
A) Euronext.
B) FTSE.
C) Nikkei.
D) Toronto.
E) Hang Seng
11) In 2015, the U.S. equity market represented ________ of the world equity market.
A) 19%
B) 60%
C) 43%
D) 41%
E) 79%
12) The straightforward generalization of the simple CAPM to international stocks is
problematic because
A) inflation-risk perceptions by different investors in different countries will differ as
consumption baskets differ.
B) investors in different countries view exchange-rate risk from the perspective of different
domestic currencies.
C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to
hold a world-index portfolio.
D) All of the options are correct.
E) None of the options are correct.
13) The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound = U.S.
$1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from now, the return a
U.S. investor can expect to earn by investing in U.K. bills is
A) −6.7%.
B) 0%.
C) 8%.
D) 1.25%.
E) None of the options are correct.
14) Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1
pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a
1-year risk-free security in Britain that would induce a U.S. investor to invest in the British
security?
A) 2.44%
B) 2.50%
C) 7.00%
D) 7.62%
E) None of the options are correct.
15) The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US
$0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S. $) that a U.S.
investor can earn by investing in the Canadian security is
A) 3.59%.
B) 4.00%.
C) 5.23%.
D) 8.46%.
E) None of the options are correct.
16) Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of
return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future
exchange rate of ________ for the pound would make a U.S. investor indifferent between
investing in the U.S. security and investing in the British security.
A) 1.6037
B) 2.0411
C) 1.7500
D) 2.3369
17) The present exchange rate is C$ = 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.
A) 2.4%
B) 1.3%
C) 6.4%
D) 6.7%
E) None of the options are correct.
18) 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
A) 12.0%.
B) 12.5%.
C) 13.0%.
D) 15.5%.
19) 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 standard deviation of return of your portfolio would be
A) 12.53%.
B) 15.21%.
C) 17.50%.
D) 18.75%.
20) The major concern that has been raised with respect to the weighting of countries within the
EAFE index is
A) currency volatilities are not considered in the weighting.
B) cross-correlations are not considered in the weighting.
C) inflation is not represented in the weighting.
D) the weights are not proportional to the asset bases of the respective countries.
E) None of the options are correct.
21) 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.
A) 16.7%
B) 20.0%
C) 28.0%
D) 40.0%
E) None of the options are correct.
22) U.S. investors
A) can trade derivative securities based on prices in foreign security markets.
B) cannot trade foreign derivative securities.
C) can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo
stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K. and European
stocks.
D) can trade derivative securities based on prices in foreign security markets and can trade
options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange
and on FTSE (Financial Times Share Exchange) indexes of U.K. and European stocks.
E) None of the options are correct.
23) Exchange-rate risk
A) results from changes in the exchange rates between the currency of the investor and the
country in which the investment is made.
B) can be hedged by using a forward or futures contract in foreign exchange.
C) cannot be eliminated.
D) results from changes in the exchange rates between the currency of the investor and the
country in which the investment is made and cannot be eliminated.
E) results from changes in the exchange rates between the currency of the investor and the
country in which the investment is made and can be hedged by using a forward or futures
contract in foreign exchange.
24) International investing
A) cannot be measured against a passive benchmark, such as the S&P 500.
B) can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe,
Australia, Far East).
C) can be measured against international indexes.
D) can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe,
Australia, Far East), and against international indexes.
E) None of the options are correct.
25) Investors looking for effective international diversification should
A) invest about 60% of their money in foreign stocks.
B) invest the same percentage of their money in foreign stocks that foreign equities represent in
the world equity market.
C) frequently hedge currency exposure.
D) invest about 60% of their money in foreign stocks and invest the same percentage of their
money in foreign stocks that foreign equities represent in the world equity market.
E) None of the options.
26) The manager of Quantitative International Fund uses EAFE as a benchmark. Last year’s
performance for the fund and the benchmark were as follows:
EAFE Weight
Return on
Equity
Index
Currency
Aplication
E1/E0-1
Quantitative’s
Weight
Manager’s
Return
Eur
0.30
10
%
%
0.25
9
%
Aus
0.10
5
%
%
0.25
8
%
FE
0.60
15
%
%
0.50
16
%
Calculate Quantitative’s currency selection return contribution.
A) +20%
B) −5%
C) +15%
D) +5%
E) −10%