Chapter 25 – International Diversification
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Chapter 25
International Diversification
Multiple Choice Questions
1. Shares of several foreign firms are traded in the U.S. markets in the form of
Difficulty: Easy
2. __________ refers to the possibility of expropriation of assets, changes in tax policy, and
the possibility of restrictions on foreign exchange transactions.
Difficulty: Easy
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3. __________ are mutual funds that invest in one country only.
A. ADRs
B. ECUs
Difficulty: Easy
4. The performance of an internationally diversified portfolio may be affected by
Difficulty: Easy
5. Over the period 2001-2005, most correlations between the U.S. stock index and stock-index
portfolios of other countries were
Difficulty: Moderate
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6. The __________ index is a widely used index of non-U.S. stocks.
Difficulty: Easy
7. The __________ equity market had the highest average local currency return between 2001
and 2005.
Difficulty: Moderate
8. The developed country with the highest average local-currency equity-market return
between 2001 and 2005 is
Difficulty: Moderate
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9. The emerging market country with the highest average local-currency equity-market return
between 2001 and 2005 is
Difficulty: Moderate
10. The __________ equity market had the highest average U.S. dollar return between 2001
and 2005.
Difficulty: Moderate
11. The developed country with the highest average U.S. dollar equity-market return between
2001 and 2005 is
Difficulty: Moderate
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12. The emerging market country with the highest average U.S. dollar equity-market return
between 2001 and 2005 is
Difficulty: Moderate
13. The __________ equity market had the lowest average local currency return between
2001 and 2005.
Difficulty: Moderate
14. The developed country with the lowest average local-currency equity-market return
between 2001 and 2005 is
Difficulty: Moderate
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15. The emerging market country with the lowest average local-currency equity-market return
between 2001 and 2005 is
Difficulty: Moderate
16. The __________ equity market had the lowest average U.S. dollar return between 2001
and 2005.
Difficulty: Moderate
17. The developed country with the lowest average U.S. dollar equity-market return between
2001 and 2005 is
Difficulty: Moderate
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18. The emerging market country with the lowest average U.S. dollar equity-market return
between 2001 and 2005 is
Difficulty: Moderate
19. The __________ equity market had the highest average U.S. dollar standard deviation
between 2001 and 2005.
Difficulty: Moderate
20. The __________ equity market had the lowest average U.S. dollar standard deviation
between 2001 and 2005.
Difficulty: Moderate
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21. The __________ equity market had the highest average local currency standard deviation
between 2001 and 2005.
Difficulty: Moderate
22. The __________ equity market had the lowest average local currency standard deviation
between 2001 and 2005.
Difficulty: Moderate
23. In 2005, the U.S. equity market represented __________ of the world equity market.
Difficulty: Moderate
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24. The straightforward generalization of the simple CAPM to international stocks is
problematic because __________.
Difficulty: Moderate
25. 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
Difficulty: Moderate
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26. 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 = $1.57. What is the minimum yield
on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the
British security?
Difficulty: Moderate
27. The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ =
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 __________.
1.08[0.76/0.78] = x – 1; x = 5.23%.
Difficulty: Moderate
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28. 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. $1.65. A 1-year future
exchange rate of __________ for the pound would make a U.S. investor indifferent between
investing in the U.S. security and investing the British security.
1.04/1.07 = x/1.65; x = 1.6037.
Difficulty: Moderate
29. The present exchange rate is C$ = U.S. $0.78. The one year future rate is C$ = 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 investor indifferent between investing in the U.S. bill and the
Canadian bill.
Difficulty: Moderate
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%.