Chapter 25 – International Diversification
25–12
30. 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 __________.
Difficulty: Moderate
31. 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 __________.
Difficulty: Difficult
32. The major concern that has been raised with respect to the weighting of countries within
the EAFE index is
Difficulty: Moderate
25–13
33. 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.
Difficulty: Moderate
34. U.S. investors
Difficulty: Moderate
25–14
35. Exchange rate risk
Difficulty: Moderate
36. International investing
Difficulty: Moderate
25–15
37. Investors looking for effective international diversification should
Difficulty: Moderate
The manager of Quantitative International Fund uses EAFE as a benchmark. Last year’s
performance for the fund and the benchmark were as follows:
38. Calculate Quantitative’s currency selection return contribution.
Difficulty: Difficult
25–16
39. Calculate Quantitative’s country selection return contribution.
Difficulty: Difficult
40. Calculate Quantitative’s stock selection return contribution.
Difficulty: Moderate
41. Using the S&P500 portfolio as a proxy of the market portfolio
Difficulty: Easy
25–17
42. The average country equity market share is
Difficulty: Moderate
43. When an investor adds international stocks to her portfolio
Difficulty: Easy
44. Which of the following countries has an equity index that lies on the efficient frontier
generated by allowing international diversification?
Difficulty: Moderate
25–18
45. “ADRs” stands for ___________ and “WEBS” stands for ____________.
Difficulty: Easy
46. WEBS portfolios
Difficulty: Moderate
47. The EAFE is
Difficulty: Easy
25–19
48. Home bias refers to
Difficulty: Easy
Short Answer Questions
49. Discuss performance evaluation of international portfolio managers in terms of potential
sources of abnormal returns.
The following factors may be measured to determine the performance of an international
portfolio manager.
Difficulty: Moderate
25–20
50. Discuss some of the factors that might be included in a multifactor model of security
returns in an international application of arbitrage pricing theory (APT).
Some of the factors that might be considered in a multifactor international APT model are:
Difficulty: Moderate
25–21
51. Marla holds her portfolio 100% in U.S. securities. She tells you that she believes foreign
investing can be extremely hazardous to her portfolio. She’s not sure about the details, but has
“heard some things”. Discuss this idea with Marla by listing three objections you have heard
from your clients who have similar fears. Explain each of the objections is subject to faulty
reasoning.
A few of the factors students may mention are
– Client: “The U.S. markets have done extremely well in the past few years, so I should stay
100% invested in them.” Your Reply: You can explain that there are other times when foreign
markets have beat the U.S. substantially in performance. You can’t tell easily beforehand what
markets will do the best. It is important to consider that there are many times when countries’
markets move in different directions and you can buffer your risk to some extent by investing
globally.
– Client: “You should keep your money at home.” Your Reply: Don’t confuse familiarity with
good portfolio management. Even though there is a lot of information available on U.S.
companies, it can be difficult to use the information to make good forecasts. Most
professional managers aren’t even good at this.
Difficulty: Moderate
25–22
52. You are managing a portfolio that consists of U.S. equities. You have prepared a
presentation to use when you discuss the possibility of adding international stocks to your
client’s portfolio.
– Draw a graph that shows the risk of the portfolio relative to the number of stocks held in the
portfolio.
Difficulty: Moderate