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1. In 2011, U.S. securities represented ______ of the world market for equities.
2. _____ has the highest market capitalization of listed corporations among developed
markets.
3. Total capitalization of corporate equity in the United States in 2011 was about _______
trillion.
4. If you limit your investment opportunity set to only the largest six countries in the world in
terms of equity capitalization as a percentage of total global equity capital, you will include about
_______ of the world's equity.
5. Limiting your investments to the top six countries in the world in terms of market
capitalization may make sense for _________ investor but probably does not make sense for
________ investor.
6. WEBS are ____________________.
7. Which one of the following allows you to purchase the stock of a specific foreign
company?
8. Generally speaking, countries with ______ capitalization of equities ________.
9. The 32 "developed" countries with the largest equity capitalization made up about _____ of
the world GDP in 2011.
10. According to a regression of GDP on market capitalization in 2010, virtually all developed
countries had _______ per capita GDP than (as) predicted by the regression.
11. If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is
.98, what is the indirect quote?
12. EAFE stands for _______.
13. Which one of the following country risks includes the possibility of expropriation of assets,
changes in tax policy, and restrictions on foreign exchange transactions?
14. The __________ index is a widely used index of non-U.S. stocks.
15. Suppose that U.S. equity markets represent about 35% of total global equity markets and
that the typical U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is
an example of _________.
16. The four largest economies in the world in 2010 were ____________.
17. The proper formula for interest rate parity is ___________.
18. Research indicates that exchange risk of the major currencies has been _________ so far
in this century.
19. It appears from empirical work that exchange rate risk ____________.
20. Passive investors with well-diversified international portfolios _________.
21. Which stock market has the largest weight in the EAFE index?
22. The correlation coefficient between the U.S. stock market index and stock market indexes
of major countries is __________.
23. In 2010, the ___ countries with the largest capitalization of equities made up
approximately 60% of the world equity portfolio.
24. Investor portfolios are notoriously overweighted in home-country stocks. This is commonly
called ________.
25. Corruption is _________ risk variable.
26. A U.S. hedge fund owns Swiss franc bonds. The fund manager believes that if Swiss
interest rates rise relative to U.S. interest rates, the value of the franc will rise. To limit the risk to
the fund's dollar return, the fund manager should __________.
27. The annual inflation rate is ______ risk variable.
28. A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per
euro, and in 6 months the exchange rate is expected to be $1.35. The 6-month forward rate is
currently $1.36 per euro. If the insurer's goal is to limit its risk, should the insurer hedge this
transaction? If so how?
29. A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-
month forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121
yen per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro.
30. You invest in various broadly diversified international mutual funds as well as your U.S.
portfolio. The one risk you probably don't have to worry about affecting your returns is
__________.
31. According to the
International
Country
Risk
Guide
in 2011, which of the following countries
was the riskiest according to the current composite risk rating?
32. Suppose the 6-month risk-free rate of return in the United States is 5%. The current
exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum
yield on a 6-month risk-free security in Britain that would induce a U.S. investor to invest in the
British security is ________.
33. The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate
is C$1 = US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that
a U.S. investor can earn by investing in the Canadian security is __________.
34. Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-
free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future
exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S.
security and investing in the British security.
35. The risk-free interest rate in the United States is 4%, while the risk-free interest rate in
the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year futures
rate on the British pound should be worth __________.
36. The risk-free interest rate in the United States is 8%, while the risk-free interest rate in
the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot
market value of the British pound today should be __________.
37. The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The
yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors
indifferent between investing in the U.S. bill and the Canadian bill.
38. The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1
pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the
return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.
39. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The
expected return and standard deviation of return on the U.S. stock market are 13% and 15%,
respectively. The expected return and standard deviation of return on the Canadian stock market
are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock
markets is 1.2%. 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 __________.
40. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The
expected return and standard deviation of return on the U.S. stock market are 10% and 15%,
respectively. The expected return and standard deviation of return on the Canadian stock market
are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock
markets is .012. 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 on your portfolio would be __________.
41. Inclusion of international equities in a U.S. investor's portfolio has historically produced
___________________.
