27) 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 country selection return contribution.
A) 12.5%
B) −12.5%
C) 11.25%
D) −1.25%
E) 1.25%
28) 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 stock selection return contribution.
A) 1.0%
B) −1.0%
C) 3.0%
D) 0.25%
29) Using the S&P 500 portfolio as a proxy of the market portfolio
A) is appropriate because U.S. securities represent more than 60% of world equities.
B) is appropriate because most U.S. investors are primarily interested in U.S. securities.
C) is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S.
securities.
D) is inappropriate because U.S. securities make up less than 41% of world equities.
E) is inappropriate because the average U.S. investor has less than 20% of his or her portfolio in
non-U.S. equities.
30) The average country equity market share is
A) less than 2%.
B) between 3% and 4%.
C) between 5% and 7%.
D) between 7% and 8%.
E) greater than 8%.
31) When an investor adds international stocks to his or her U.S. stock portfolio,
A) it will raise his or her risk relative to the risk he or she would face just holding U.S. stocks.
B) he or she can reduce the risk of his or her portfolio.
C) he or she will increase his or her expected return but must also take on more risk.
D) it will have no impact on either the risk or the return of his or her portfolio.
E) he or she needs to seek professional management because he or she doesn’t have access to
international investments on his or her own.
32) Using local currency returns, the S&P 500 has the lowest correlation with:
A) Euronext
B) FTSE
C) Nikkei
D) Toronto
E) Shanghai
33) “ADRs” stands for ________, and “WEBS” stands for ________.
A) additional dollar returns; weekly equity and bond survey
B) additional daily returns; world equity and bond survey
C) American dollar returns; world equity and bond statistics
D) American depository receipts; world equity benchmark shares
E) adjusted dollar returns; weighted equity benchmark shares
34) WEBS portfolios
A) are passively managed.
B) are shares that can be sold by investors.
C) are free from brokerage commissions.
D) are passively managed and are shares that can be sold by investors.
E) All of the options are correct.
35) The EAFE is
A) the East Asia Foreign Equity index.
B) the Economic Advisor’s Foreign Estimator index.
C) the European and Asian Foreign Equity index.
D) the European, Asian, French Equity index.
E) the European, Australian, Far East index.
36) Home bias refers to
A) the tendency to vacation in your home country instead of traveling abroad.
B) the tendency to believe that your home country is better than other countries.
C) the tendency to give preferential treatment to people from your home country.
D) the tendency to overweight investments in your home country.
E) None of the options are correct.
37) The possibility of experiencing a drop in revenue or an increase in cost in an international
transaction due to a change in foreign exchange rates is called
A) foreign exchange risk.
B) political risk.
C) translation exposure.
D) hedging risk.
38) As exchange rates change, they
A) change the relative purchasing power between countries.
B) can affect imports and exports between those two countries.
C) will affect the flow of funds between the countries.
D) All of the options are true.
39) When Country A’s currency strengthens against Country B’s, citizens of Country A will
A) pay less to buy Country B’s products.
B) pay more to buy Country B’s products.
C) pay more to buy domestically-produced products.
D) not be affected by the change in their currency’s value.
40) The interplay between interest rate differentials and exchange rates, such that each adjusts
until the foreign exchange market and the money market reach equilibrium, is called the
A) Purchasing Power Parity Theory.
B) Balance of Payments.
C) Interest Rate Parity Theory.
D) None of the options are correct.
41) The yield on a 1-year bill in the U.K. is 6%, and the present exchange rate is 1 pound = U.S.
$1.65. If you expect the exchange rate to be 1 pound = U.S. $1.55 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) −0.42%.
E) None of the options are correct.
42) The yield on a 1-year bill in the Euro is 6%, and the present exchange rate is 1 Euro = U.S.
$1.19. If you expect the exchange rate to be 1 Euro = U.S. $1.14 a year from now, the return a
U.S. investor can expect to earn by investing in Euro bills is
A) 1.55%.
B) 0%.
C) 8%.
D) −0.42%.
E) None of the options are correct.
43) Suppose the 1-year risk-free rate of return in the U.S. is 2% and the 1-year risk-free rate of
return in Mexico is 8%. The current exchange rate is 1 peso = U.S. $.051. A 1-year future
exchange rate of ________ for the peso would make a U.S. investor indifferent between
investing in the U.S. security and investing in the Mexican security.
A) 1.6037
B) 0.02001
C) 1.7500
D) 0.02300
E) 0.01250
44) You are a U.S. investor who purchased British securities for 2,340 pounds one year ago
when the British pound cost $1.52. 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
2,440 pounds and the pound is worth $1.61.
A) 16.7%
B) 20.0%
C) 12.5%
D) 10.4%
E) None of the options are correct
45) Assume there is a fixed exchange rate between the Euro and U.S. dollar. The expected return
and standard deviation of return on the U.S. stock market are 16% and 13%, respectively. The
expected return and standard deviation on the DAX stock market are 11% and 18%, respectively.
The covariance of returns between the U.S. and German stock market is 1.5%.
If you invested 50% of your money in the German (DAX) 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) 13.5%.
46) 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%.
47) Assume there is a fixed exchange rate between the Swiss Franc and U.S. dollar. The
expected return and standard deviation of return on the U.S. stock market are 14% and 11%,
respectively. The expected return and standard deviation on the Swiss Stock Exchange (SIX)
are 9% and 14%, respectively. The covariance of returns between the U.S. and the SIX is
1.75%.
If you invested 350% of your money in the Swiss (SIX) stock market and 65% in the U.S. stock
market, the expected return on your portfolio would be
A) 12.25%.
B) 12.5%.
C) 13.0%.
D) 13.5%.
48) Assume there is a fixed exchange rate between the Yen and U.S. dollar. The expected return
and standard deviation of return on the U.S. stock market are 21% and 15%, respectively. The
expected return and standard deviation on the Japanese stock market are 13% and 12%,
respectively. The covariance of returns between the U.S. and Japanese stock market is 2.5%.
If you invested 60% of your money in the Japanese stock market and 40% in the U.S. stock
market, the expected return on your portfolio would be
A) 12.0%.
B) 16.2%.
C) 17.4%.
D) 18.5%.
49) The present exchange rate is 1 Nigerian Niara (NGN) = U.S. $0.002896. The 1-year future
rate is NGN = U.S. $0.002774. The yield on a 1-year U.S. bill is 3.2%. A yield of ________ on a
1-year Nigerian bill will make an investor indifferent between investing in the U.S. bill and the
Nigerian bill (NTB).
A) 2.94%
B) 1.73%
C) 6.04%
D) 7.74%
E) None of the options are correct
50) Suppose the 1-year risk-free rate of return in the U.S. is 3.5%. The current exchange rate is 1
pound = U.S. $1.70. The 1-year forward rate is 1 pound = $1.65. 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) 2.64%
B) 2.85%
C) 3.34%
D) 6.62%
E) None of the options are correct