投资经济学题目25

Multiple Choice Questions1. Shares of several foreign firms are traded in the U. S. markets in the form ofA) ADRs.B) ECUs.C) single-country funds.D) all of the above.E) none of the above.Answer: A Difficulty: EasyRationale: American Depository Receipts (ADRs) allow U. S. investors to invest in foreign stocks via transactions on the U. S. stock exchanges.2. __________ refers to the possibility of expropriation of assets, changes in tax policy,and the possibility of restrictions on foreign exchange transactions.A) Default riskB) Foreign exchange riskC) Market riskD) Political riskE) None of the aboveAnswer: D Difficulty: EasyRationale: All of the above factors are political in nature, and thus are examples ofpolitical risk.3. __________ are mutual funds that invest in one country only.A) ADRsB) ECUsC) Single-country fundsD) All of the aboveE) None of the aboveAnswer: C Difficulty: EasyRationale: Mutual funds that invest in the stocks of one country only are calledsingle-country funds.4. The performance of an internationally diversified portfolio may be affected byA) country selection.B) currency selection.C) stock selection.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: All of the above factors may affect the performance of an international portfolio.5. Over the period 1997-2001, most correlations between the U.S. stock index and stock-and bond-index portfolios of other countries wereA) negativeB) positive but less than .5C) approximately zeroD) .9 or aboveE) none of the aboveAnswer: B Difficulty: ModerateRationale: Correlation coefficients were typically below .5, while correlations between well-diversified U. S. market portfolios were typically above .9. See Table 25.11 on page 923.6. The __________ index is a widely used index of non-U. S. stocks.A) CBOEB) Dow JonesC) EAFED) all of the aboveE) none of the aboveAnswer: C Difficulty: EasyRationale: The Europe, Australia, Far East (EAFE) index computed by Morgan Stanley is a widely used index of non-U. S. stocks.7. The __________ equity market had the highest average local currency return between1997 and 2001.A) TurkishB) NorwegianC) U. K.D) U. S.E) none of the aboveAnswer: A Difficulty: ModerateRationale: See Table 25.10 on page 919.8. The __________ equity market had the highest average U.S. dollar return between 1997and 2001.A) TurkishB) FinnishC) U. K.D) U. S.E) none of the aboveAnswer: B Difficulty: ModerateRationale: See Table 25.10 on page 919.9. The __________ equity market had the highest average U.S. dollar standard deviationbetween 1997 and 2001.A) TurkishB) FinnishC) IndonesianD) U. S.E) none of the aboveAnswer: C Difficulty: ModerateRationale: See Table 25.10 on page 919.10. The __________ equity market had the highest average local currency standarddeviation between 1997 and 2001.A) TurkishB) FinnishC) IndonesianD) U. S.E) none of the aboveAnswer: A Difficulty: ModerateRationale: See Table 25.10 on page 919.11. In 2001, the U. S. equity market represented __________ of the world equity market.A) 19%B) 60%C) 43%D) 49%E) none of the aboveAnswer: D Difficulty: ModerateRationale: See Table 25.1 on page 907.12. The straightforward generalization of the simple CAPM to international stocks isproblematic because __________.A) inflation risk perceptions by different investors in different countries will differ asconsumption baskets differB) investors in different countries view exchange rate risk from the perspective ofdifferent domestic currenciesC) taxes, transaction costs and capital barriers across countries make it difficult forinvestor to hold a world index portfolioD) all of the aboveE) none of the above.Answer: D Difficulty: ModerateRationale: All of the above factors make a broad generalization of the CAPM tointernational stocks problematic.13. 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 isA) -6.7%B) 0%C) 8%D) 1.25%E) none of the aboveAnswer: D Difficulty: ModerateRationale: r(US) = [1 + r(UK)]F0/E0 - 1; [1.08][1.50/1.60] - 1 = 1.25%.14. Suppose the 1-year risk-free rate of return in the U. S. is 5%. The current exchange rateis 1 pound = U. S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is theminimum yield on a 1-year risk-free security in Britain that would induce a U. S.investor to invest in the British security?A) 2.44%B) 2.50%C) 7.00%D) 7.62%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 1.05 = (1 + r) X [1.57/1.60] - 1; r = 7.0%.15. The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ =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 __________.A) 3.59%B) 4.00%C) 5.23%D) 8.46%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 1.08[0.76/0.78] = x - 1; x = 5.23%.16. Suppose the 1-year risk-free rate of return in the U. S. is 4% and the 1-year risk-free rateof return in Britain is 7%. The current exchange rate is 1 pound = U. S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U. S. investorindifferent between investing in the U. S. security and investing the British security.A) 1.6037B) 2.0411C) 1.7500D) 2.3369E) none of the aboveAnswer: A Difficulty: ModerateRationale: 1.04/1.07 = x/1.65; x = 1.6037.17. The present exchange rate is C$ = 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.A) 2.4%B) 1.3%C) 6.4%D) 6.7%E) none of the aboveAnswer: D Difficulty: ModerateRationale: 1.04 = [($0.76/$0.78)(1 + r)] - 1; r = 6.7%.Use the following to answer questions 18-19: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%.18. 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%E) none of the aboveAnswer: D Difficulty: ModerateRationale: 18% (0.5) + 13%(0.5) = 15.5%.19. 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 __________.A) 12.53%B) 15.21%C) 17.50%D) 18.75%E) none of the aboveAnswer: A Difficulty: DifficultRationale: s P = [(0.5)2(15%)2 + (0.5)2(20%)2 + 2(0.5)(0.5)(1.5)]1/2 = 12.53%.20. The major concern that has been raised with respect to the weighting of countries withinthe EAFE index isA) currency volatilities are not considered in the weighting.B) cross-correlations are not considered in the weighting.C) inflation is not represented in the weighting.D) the weights are not proportional to the asset bases of the respective countries.E) none of the aboveAnswer: D Difficulty: ModerateRationale: Some argue that countries should be weighted in proportion to their GDP to properly adjust for the true size of their corporate sectors, since many firms are not publicly traded.21. The correlation coefficients between the returns on a broad index of U. S. stocks and thereturns on indices of the stocks of other industrialized countries are, in general,__________, while the correlation coefficients between the returns on variousdiversified portfolios of U. S. stocks are, in general, __________.A) less than 0, greater than 0B) greater than 0, less than 0C) less than 0.8, greater than 0.8D) greater than 0.8, less than 0.8E) less than 0, less than 0Answer: C Difficulty: ModerateRationale: See Table 25.2 on page 909 and the accompanying discussion.22. You are a U. S. investor who purchased British securities for 2,000 pounds one year agowhen 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.A) 16.7%B) 20.0%C) 28.0%D) 40.0%E) none of the aboveAnswer: C Difficulty: ModerateRationale: ($3,840 - $3,000)/$3,000 = 0.28, or 28.0%.23. U. S. investorsA) can trade derivative securities based on prices in foreign security markets.B) cannot trade foreign derivative securities.C) can trade options and futures on the Nikkei stock index of 225 stocks traded on theTokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes ofU. K. and European stocks.D) A and C.E) none of the above.Answer: D Difficulty: ModerateRationale: U. S. investors can invest as indicated in A, examples of which are given in C.24. Exchange rate riskA) results from changes in the exchange rates in the currencies of the investor and thecountry in which the investment is made.B) can be hedged by using a forward or futures contract in foreign exchange.C) cannot be eliminated.D) A and C.E) A and B.Answer: E Difficulty: ModerateRationale: Although international investing involves risk resulting from the changing exchange rates between currencies, this risk can be hedged by using a forward or futures contract in foreign exchange.25. International investingA) cannot be measured against a passive benchmark, such as the S&P 500.B) can be measured against a widely used index of non-U. S. stocks, the EAFE index(Europe, Australia, Far East).C) can be measured against international indexes computed by Morgan Stanley,Salomon Brothers, First Boston and Goldman, Sachs, among others.D) B and C.E) none of the above.Answer: D Difficulty: ModerateRationale: International investments can be evaluated against an international index, such as EAFE, created by Morgan Stanley, and others that have become available in recent years.26. Foreign index funds such as WEBS may be more useful as diversification tools thanclosed-end funds or ADRS becauseA) they have similar expense ratios to open-end country funds.B) they are well-diversified and continuously priced.C) they sell at a discount to net asset value.D) they are actively managed.E) all of the above.Answer: B Difficulty: ModerateRationale: See the text box on page 921.27. Investors looking for effective international diversification shouldA) invest about 60% of their money in foreign stocks.B) invest the same percentage of their money in foreign stocks that foreign equitiesrepresent in the world equity market.C) frequently hedge currency exposure.D) both A and B.E) none of the above.Answer: E Difficulty: ModerateRationale: See the text box on page 930.28. In the long run, diversifying into international markets is most likely to benefit U.S.investorsA) when U.S. markets are performing poorly.B) when U.S. markets are performing well.C) under all U. S. market conditions.D) under no circumstances.E) only when currency risk is hedged.Answer: A Difficulty: ModerateRationale: See text box page 921.Use the following to answer questions 29-31:The manager of Diversified International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows:EAFE WeightReturn onEquity IndexCurrency ApplicationE1 / E0 - 1Diversified'sWeightDiversified'sReturnEur. .30 10% 10% .25 9% Aus. .10 5% - 10% .25 8% FE .60 15% 30% .50 16%29. Calculate Diversified's currency selection return contribution.A) +20%B) -5%C) +15%D) +5%E) -10%Answer: B Difficulty: DifficultRationale: EAFE: (.30)(10%) + (.10)(-10%) + (.60)(30%) = 20% appreciation;Diversified: (.25)(10%) + (.25)(-10%) + (.50)(30%) = 15% appreciation; Loss of 5% relative to EAFE.30. Calculate Diversified's country selection return contribution.A) 12.5%B) -12.5%C) 11.25%D) -1.25%E) 1.25%Answer: D Difficulty: DifficultRationale: EAFE: (.30)(10%) + (.10)(5%) + (.60)(15%) = 12.5%; Diversified:(.25)(10%) + (.25)(5%) + (.50)(15%) = 11.25%; Loss of 1.25% relative to EAFE.31. Calculate Diversified's stock selection return contribution.A) 1.0%B) -1.0%C) 3.0%D) 0.25%E) none of the above.Answer: A Difficulty: ModerateRationale: (9% - 10%).25 + (8% - 5%).25 + (16% - 15%).50 = 1.00%32. Using the S&P500 portfolio as a proxy of the market portfolioA) 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 inU.S. securities.D) is inappropriate because U.S. securities make up less than 50% of world equities.E) is inappropriate because the average U.S. investor has less than 20% of her portfolioin non-U.S. equities.Answer: D Difficulty: EasyRationale: It is important to take a global perspective when making investmentdecisions. The S&P500 is increasingly inappropriate.33. The average country equity market share isA) less than 2%B) between 3% and 4%C) between 5% and 7%D) between 7% and 8%E) greater than 8%Answer: A Difficulty: ModerateRationale: This is stated in the text and confirmed by Table 25.1 on page 907.34. When an investor adds international stocks to her portfolioA) it will raise her risk relative to the risk she would face just holding U.S. stocks.B) she can reduce its risk relative to the risk she would face just holding U.S. stocks.C) she will increase her expected return, but must also take on more risk.D) it will have no significant impact on either the risk or the return of her portfolio.E) she needs to seek professional management because she doesn't have access tointernational stocks on her own.Answer: B Difficulty: EasyRationale: See Figure 25.1 on page 910.35. Which of the following countries has an equity index that lies on the efficient frontiergenerated by allowing international diversification?A) the United StatesB) the United KingdomC) JapanD) NorwayE) none of the above – each of these countries' indexes fall inside the efficient frontier.Answer: E Difficulty: ModerateRationale: See Figure 25.7 on page 916. To get to the efficient frontier you would need to combine the countries' indexes.36. “ADRs” stands for ___________ and “WEBS” stands for ____________.A) Additional Dollar Returns; Weekly Equity and Bond SurveyB) Additional Daily Returns; World Equity and Bond SurveyC) American Dollar Returns; World Equity and Bond StatisticsD) American Depository Receipts; World Equity Benchmark SharesE) Adjusted Dollar Returns; Weighted Equity Benchmark SharesAnswer: D Difficulty: EasyRationale: The student should be familiar with these basic terms that relate tointernational investing.37. WEBS portfoliosA) are passively managed.B) are shares that can be sold by investors.C) are free from brokerage commissions.D) A and BE) A, B, and CAnswer: D Difficulty: ModerateRationale: They are passively managed and when holders want to divest their shares they sell them rather than redeeming them with the company that issued them. There are brokerage commissions, however. See the text box on page 921.38. The EAFE isA) 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.Answer: E Difficulty: EasyRationale: The index is one of several world equity indices that exist. It is computed by Morgan Stanley.39. Home bias refers toA) 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 above.Answer: DShort Answer Questions40. Discuss performance evaluation of international portfolio managers in terms ofpotential sources of abnormal returns.Answer: The following factors may be measured to determine the performance of aninternational portfolio manager.(A)Currency selection: a benchmark might be the weighted average of the currencyappreciation of the currencies represented in the EAFE portfolio.(B)Country selection measures the contribution to performance attributable toinvesting in the better-performing stock markets of the world. Country selectioncan be measured as the weighted average of the equity index returns of each countryusing as weights the share of the manager's portfolio in each country.(C)Stock selection ability may be measured as the weighted average of equity returnsin excess of the equity index in each country.(D)Cash/bond selection may be measured as the excess return derived from weightingbonds and bills differently from some benchmark weights.The rationale for this question is to determine the student's understanding of evaluating the various components of potential abnormal returns resulting from actively managing an international portfolio.Difficulty: Moderate41. Discuss some of the factors that might be included in a multifactor model of securityreturns in an international application of arbitrage pricing theory (APT).Answer: Some of the factors that might be considered in a multifactor international APT model are:(A)A world stock index(B)A national (domestic) stock index(C)Industrial/sector indexes(D)Currency movements.Studies have indicated that domestic factors appear to be the dominant influence on stock returns. However, there is clear evidence of a world market factor during the market crash of October 1987.The rationale for this question is to determine the student's understanding of the possible effects of various factors on an international portfolio.Difficulty: Moderate42. Aunt Gunda holds her portfolio 100% in U.S. securities. She tells you that she believesforeign investing can be extremely hazardous to her portfolio. She's not sure about the details, but has “heard some things”. Discuss this idea with Aunt Gunda by listing three objections you have heard from your clients who have similar fears. Explain each of the objections is subject to faulty reasoning.Answer: 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 Repl y: You can explain that there areother 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 toconsider that there are many times when countries' markets move in differentdirections 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 ofinformation 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.∙Client: “There's too much currency risk.” Your Reply: It is true that there may be times when both a security's value in its own currency and the currency exchangerate may lead to poor returns. But the opposite is also true. And there are caseswhen security price movements and currency movements will have oppositeimpacts on your portfolio's return. This may have a smoothing effect on yourportfolio.∙Client: “Invest with the best.” Your Reply: Even if U.S. markets have been the best performers in recent periods there is no guarantee that things will stay that way. Ifyou diversify internationally you will benefit when other markets take the lead.These items are discussed in the text box on page 921. Other responses are alsopossible.Difficulty: Moderate43. You are managing a portfolio that consists of U.S. equities. You have prepared apresentation 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.∙When your client arrives, he is surprised at your suggestion that he add international stocks, but is willing to listen to your statements to justify your recommendations.State two reasons why he should consider the international stocks and brieflyexplain each.∙Your client has been persuaded by your reasoning and is willing to add some international stocks. But he also wants to discuss adding some real estate stocks to his portfolio. Draw another line on the same graph that shows him the likely result of this action. Explain briefly why the graph changed in this way.Answer: The graph should look like the one that is shown on page 924 before real estate is added.∙Two important reasons for adding international securities are the favorable diversification effects due to the less than perfect positive correlations amongcountries' returns and the possible benefit from currency risk.∙The addition of real estate stocks gives even more risk reduction benefit, again because of the less than perfect positive correlation with the other assets in theportfolio. In lay terms, the real estate sector's returns will help to buffer sharpmovements in other sectors you already hold, and therefore will reduce theportfolio's risk.This question tests the student's knowledge of the basic ideas behind investing ininternational stocks and other classes of equities, both domestic and foreign that are currently not in the portfolio.Difficulty: Moderate。