Multinational Business Finance 13th Edition Test Bank Chapter 16

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett)

Chapter 16 International Portfolio Theory and Diversification

16.1 International Diversification and Risk

Multiple Choice

Question: Beta may be defined as:

A) the measure of systematic risk.

B) a risk measure of a portfolio.

C) the ratio of the variance of the portfolio to the variance of the market.

D) all of the above

Answer:

Question: ________ risk is measured with beta.

A) Systematic

B) Unsystematic

C) International

D) Domestic

Answer:

Question: A fully diversified domestic portfolio has a beta of:

A) 0.0

B) 1.0

C) -1.0

D) There is not enough information to answer this question.

Answer:

Question: Unsystematic risk:

A) is the remaining risk in a well-diversified portfolio.

B) is measured with beta.

C) can be diversified away.

D) all of the above

Answer:

Question: A well-diversified portfolio has about ________ of the risk of the typical

individual stock.

A) 8%

B) 19%

C) 27%

D) 52%

Answer:

Question: An internationally diversified portfolio:

A) should result in a portfolio with a lower beta than a purely domestic portfolio.

B) has the same overall risk shape as a purely domestic portfolio.

C) is only about 12% as risky as the typical individual stock.

D) all of the above

Answer:

Question: In some respects, internationally diversified portfolios are the same in principle

as a domestic portfolio because:

A) the investor is attempting to combine assets that are perfectly correlated.

B) investors are trying to reduce systematic risk.

C) investors are trying to reduce the total risk of the portfolio.

D) all of the above

Answer:

Question: In some respects, internationally diversified portfolios are different from a

domestic portfolio because:

A) investors may also acquire foreign exchange risk.

B) international portfolio diversification increases expected return but does not decrease

risk.

C) investors must leave the country to acquire foreign securities.

D) all of the above

Answer:

Question: Refer to Instruction 16.1. How many euros will the U.S. investor acquire with

his initial $500,000 investment?

A) €650,000

B) €370,370

C) €500,000

D) €384,615

Answer:

Question: Refer to Instruction 16.1. At an average price of €60/share, how many shares of

stock will the investor be able to purchase?

A) 8333 shares

B) 6410 shares

C) 6173 shares

D) 10,833 shares

Answer:

Question: Refer to Instruction 16.1. At the end of the year the investor sells his stock that

now has an average price per share of €57. What is the investors average rate of return

before converting the stock back into dollars?

A) 5.0%

B) -3.0%

C) -5.0%

D) 3.0%

Answer:

Question: Refer to Instruction 16.1. At the end of the year the investor sells his stock that

now has an average price per share of €57. What is the investors average rate of return

after converting the stock back into dollars?

A) -1.35%

B) 5.0%

C) -5.0%

D) -7.24%

Answer:

Question: A U.S. investor makes an investment in Britain and earns 14% on the investment

while the British pound appreciates against the U.S. dollar by 8%. What is the investors

total return?

A) 22.00%

B) 23.12%

C) 6.00%

D) 4.88%

Answer:

Question: Which of the following statements is NOT true?

A) International diversification benefits induce investors to demand foreign securities.

B) An international security adds value to a portfolio if it reduces risk without reducing

return.

C) Investors will demand a security that adds value.

D) All of the above are true.

Answer:

Question: Portfolio diversification can eliminate 100% of risk.

Answer:

Question: Increasing the number of securities in a portfolio reduces the unsystematic risk

but not the systematic risk.

Answer:

Question: International diversification benefits may induce investors to demand foreign

securities.

Answer:

Question: If the addition of a foreign security to the portfolio of the investor aids in the

reduction of risk for a given level of return, then the security adds value to the portfolio.

Answer:

Question: If the addition of a foreign security to the portfolio of the investor decreases the

expected return for a given level of risk, then the security adds value to the portfolio.

Answer:

Question: Portfolio theory assumes that investors are risk-averse. This means that

investors:

A) cannot be induced to make risky investments.

B) prefer more risk to less for a given return.

C) will accept some risk, but not unnecessary risk.

D) All of the above are true.

Answer:

Question: The efficient frontier of the domestic portfolio opportunity set:

A) runs along the extreme left edge of the opportunity set.

B) represents optimal portfolios of securities that represent minimum risk for a given level

of expected portfolio return.

C) contains the portfolio of risky securities that the logical investor would choose to hold.

D) all of the above

Answer:

Question: The addition of foreign securities to the domestic portfolio opportunity set shifts

the efficient frontier:

A) down and to the left.

B) up and to the right.

C) up and to the left.

D) down and to the right.

Answer:

Question: Relative to the efficient frontier of risky portfolios, it is impossible to hold a

portfolio that is located ________ the efficient frontier.

A) to the left of

B) to the right of

C) on

D) to the right or left of

Answer:

Question: The ________ connects the risk-free security with the optimal domestic

portfolio.

A) security market line

B) capital asset pricing model

C) capital market line

D) none of the above

Answer:

Question: Refer to Instruction 16.2. What is the expected return of the proposed portfolio?

A) 9.2%

B) 9.0%

C) 19.2%

D) 19%

Answer:

Question: Refer to Instruction 16.2. What is the standard deviation of the proposed

portfolio?

A) 38.00

B) 19.20

C) 19.00

D) 14.45

Answer:

Question: The graph for the efficient frontier has beta on the vertical axis and standard

deviation of the horizontal axis.

Answer:

Question: The portfolio with the least risk among all those possible in the domestic

portfolio opportunity set is called the minimum risk domestic portfolio.

Answer:

Question: The optimal domestic portfolio of risky securities is always the portfolio of

minimum risk.

Answer:

Question: The standard deviation of a portfolio is the sum of the weighted average

standard deviations of the individual assets.

Answer:

Question: The optimal domestic portfolio combines the risk-free asset and a portfolio of

domestic securities found on the efficient frontier.

Answer:

Question: The internationally diversified portfolio opportunity set shifts TO THE RIGHT

of the purely domestic opportunity set.

Answer:

Question: Draw the curve representing the Optimal Domestic Efficient Frontier. Be sure to

draw and label the following: The vertical axis and the horizontal axis, the risk-free

security, the minimum risk portfolio, the domestic portfolio opportunity set, the optimal

domestic portfolio, and the capital market line. Choose a point along the domestic portfolio

opportunity set between the optimal domestic portfolio and the minimum risk domestic

portfolio and explain why that point is not the optimal risky domestic portfolio for

investors to hold.

Answer:

Question: The authors present a comparison of correlation coefficients between major

global equity markets over a variety of different periods. The comparison yields a number

of conclusions listed here EXCEPT:

A) the correlation between equity markets for the full twentieth century shows quite low

levels of correlation between some of the largest markets (close to 0.50 in some cases).

B) that same century of data, however, yields a high correlation between the U.S. and

Canada (0.8

Question:.

C) the correlation coefficients between those same equity markets for selected sub periods

over the last quarter of the twentieth century, however, show significantly different

correlation coefficients.

D) None of the answers listed are inaccurate conclusions.

Answer:

Question: Capital markets around the world are on average less integrated today than they

were 20 years ago.

Answer:

Question: In an empirical study on national market returns in the 20th century, Dimson,

Marsh, and Staunton (200

Question: determined that the equity returns in the United States out-performed the other

15 countries in the study.

Answer:

Question: In an empirical study on national market returns in the 20th century, Dimson,

Marsh, and Staunton (200

Question: found that just under one-half of the 16 countries in the study had negative

average returns in their equity markets.

Answer:

Question: In an empirical study on national market returns in the 20th century, Dimson,

Marsh, and Staunton (200

Question: determined that due to high levels of correlation or returns between countries,

there is almost NO BENEFIT to international portfolio diversification.

Answer:

Question: Of the major trading partners with the United States, Canada has among the

LOWEST correlation of returns with the U.S.

Answer:

Question: If an investor is able to determine a global beta for his portfolio and holds a

portfolio that is well-diversified with international investments, which performance

measure is more appropriate, the Sharpe Measure or the Treynor Measure? Why? Explain

each performance measure.

Answer:

Question: The Sharpe measure uses ________ as the measure of risk and the Treynor

measure uses ________ as the measure of risk.

A) standard deviation; variance

B) beta; variance

C) standard deviation; beta

D) beta; standard deviation

Answer:

Question: Refer to Table 16.1. What is the value of the Sharpe Measure for France?

A) 0.113

B) 0.0071

C) either A or B

D) neither A nor B

Answer:

Question: Refer to Table 16.1. What is the value of the Treynor Measure for the

Netherlands?

A) 0.197

B) 0.0109

C) either A or B

D) neither A nor B

Answer:

Question: Refer to Table 16.1. ________ appears to have the greatest amount of risk as

measured by monthly standard deviation, but ________ has the best return per unit of risk

according to the Sharpe Measure.

A) United States; Austria

B) France; Austria

C) United States; Netherlands

D) France; Netherlands

Answer:

Question: The Sharpe and Treynor Measures tend to be consistent in their ranking of

portfolios when the portfolios:

A) are poorly diversified.

B) are properly diversified.

C) contain only U.S. equity investments.

D) none of the above

Answer:

Question: The Sharpe and Treynor measures are each measures of return per unit of risk.

Answer:

Question: Good financial advice would suggest that investors should examine returns by

the amount of return per unit of risk accepted, rather than in isolation.

Answer:

Question: The denominator of the Treynor measure is portfolio risk as measured by the

standard deviation of the portfolio.

Answer:

Question: The denominator of the Sharpe measure is portfolio risk as measured by the

standard deviation of the portfolio.

Answer:

Question: The denominator of the Sharpe measure is the portfolios beta, the systematic

risk of the portfolio, as measured against the world market portfolio.

Answer:

Question: The denominator of the Treynor measure is the portfolios beta, the systematic

risk of the portfolio, as measured against the world market portfolio.

Answer: