International Investing

1. US securities represent ______ of the world market for equities.

a.
less than 25%

b.
more than 2/3

c.
between 30% and 60%

d.
a consistent 50%

2. _____ has the largest number of listed corporations among developed markets.

a.
The United States

b.
Japan

c.
The United Kingdom

d.
Switzerland

3. _______ has the highest per capita GNP among developed countries.

a.
The United States

b.
Japan

c.
The United Kingdom

d.
Switzerland

4. ________ has the highest ratio of market capitalization to GDP among developed
countries.

a.
The United States

b.
Japan

c.
The United Kingdom

d.
Switzerland

5. _______ is commonly considered an emerging market.

a.
Korea

b.
Israel

c.
Portugal

d.
all of the above

6. WEBS are _______.

a.
country specific

b.

mutual funds

c.
identical to ADRs

d.
all of the above

7. ________ give you an investment in a single foreign company.

a.
WEBS

b.
MSCIs

c.
ADRs

d.
all of the above

8. ________ is not an EAFE country.

a.
Denmark

b.
Australia

c.
Japan

d.
Canada

9. International diversification comes _______.

a.
primarily from foreign stocks

b.
primarily from foreign currency

c.
primarily from political risk

d.
from foreign stocks and foreign currency about equally

10. The main reason for international investing is to _______.

a.
reduce volatility

b.
boost returns

c.
replicate the global market

d.
hedge currency fluctuations

11. Among the factors explaining the return on a stock, _______ factors are
generally most important while _______ factors are generally least important.

a.
domestic, industrial

b.
domestic, currency

c.
world, industrial

d.
currency, domestic

12. EAFE stands for _______.

a.
Equity And Foreign Exchange

b.
European, Australian, Far East

c.
European, Asian, Foreign Exchange

d.
European, American, Far East

13. __________ refers to the possibility of expropriation of assets, changes in tax

policy and the possibility of restrictions on foreign exchange transactions.

a.
default risk

b.
foreign exchange risk

c.
market risk

d.

political risk

14. The __________ index is a widely used index of non-U.S. stocks.

a.
CBOE

b.
Dow Jones

c.
EAFE

d.
none of the above

15. The performance of an internationally diversified portfolio may be affected by

__________.

a.
country selection

b.
currency selection

c.
stock selection

d.
all of the above

16. Developed countries are those with per-capita income of more than ___ in 2000.

a.
$5,000

b.
$9,300

c.
$15,000

d.
$25,000

17. The approximate U.S. weight in the world equity index increased from __ in
1996 to __ in 2001.

a.
60, 75

b.
50, 60

c.
40, 50

d.
20, 30

18. The approximate Japanese weight in the world equity index ___ from __ in
1996 to __ in 2001.

a.
Increased 10, 25

b.
Increased 20, 30

c.
Decreased 40, 30

d.
Decreased 25, 10

19. From 1995 to 2001, market capitalization of stock exchanges in developed

countries grew the fastest in ___ .

a.
North America

b.
Europe

c.
Pacific Basin

d.
All declined

20. In 2001, which of the following countries had the highest GDP per capita.

a.
United States

b.
United Kingdom

c.
Switzerland

d.
Netherlands

21. In 2001, which of the following countries had the lowest capitalization as % of
GDP.

a.

United States

b.
United Kingdom

c.
Switzerland

d.
Netherlands

22. The correlation coefficient between the U.S. stock market index and most
foreign stock market indices is __________.

a.
less than 0.00

b.
between 0.00 and 0.50

c.
between 0.50 and 0.75

d.
greater than 0.75

23. The ___ countries with the largest capitalization of equities make up
approximately
80% of the world equity portfolio.

a.
2

b.
4

c.
6

d.
12

24. Investor portfolios are notoriously over weighted in home country stocks. This is
commonly called ___ .

a.
local fat

b.
nativism

c.
home country bias

d.
xenostockism

25. Corruption is a ___ risk variable.

a.
Firm specific

b.
Political

c.
Financial

d.
Economic

26. Exchange rate stability is a ___ risk variable.

a.
Firm specific

b.
Political

c.

Financial

d.
Economic

27. Annual inflation rate is a ___ risk variable.

a.
Firm specific

b.
Political

c.
Financial

d.
Economic

28. According to the International Country Risk Guide, September 2001, which of the
following countries had the highest political risk rating.

a.
Japan

b.
United States

c.
China

d.
India

29. According to the International Country Risk Guide, September 2001, which of the
following countries had the highest financial risk rating.

a.
Japan

b.
United States

c.
China

d.
India

30. According to the International Country Risk Guide, September 2001, which of the
following countries had the highest economic risk rating.

a.
Japan

b.
United States

c.
China

d.
India

31. According to the International Country Risk Guide, September 2001, which of the
following countries had the highest current composite risk rating.

a.
Japan

b.
United States

c.
China

d.
India

32. Suppose the 1-year risk-free rate of return in the USA is 6%. The current
exchange rate is 1 Pound = US $2.00. The 1-year forward rate is 1 Pound = US

$1.90. 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 is:

a.
-0.44%

b.
0.0%

c.
0.70%

d.
11.58%

33. The interest rate on a 1-year Canadian security is 5%. The current exchange
rate is C $1 = US $0.72. The 1-year forward rate is C $1 = US $0.70. The return
(denominated in US$) that a U.S. investor can earn by investing in the Canadian
security is __________.

a.
2.1%

b.
2.5%

c.
3.5%

d.
7.1%

34. Suppose the 1-year risk-free rate of return in the USA is 5% and the 1-year riskfree rate of return in Britain is 7%. The current exchange rate is 1 Pound = US
$2.05. 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 in
the British security.

a.
1.916

b.
2.012

c.
2.153

d.
2.194

35. The risk-free interest rate in the US is 4% while the risk-free interest rate in the
UK is 9%. If the British pound is worth $2.00 in the spot market, a 1-year
futures on the British pound should be worth __________.

a.
$1.83

b.
$1.91

c.
$2.08

d.
$2.18

36. The risk-free interest rate in the US is 8% while the risk-free interest rate in the
UK 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 __________.

a.
$1.93

b.
$2.22

c.
$2.56

d.
$2.76

37. The present exchange rate is C $1 = US $0.77. The 1-year future rate is C $1 =
US $0.73. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1year Canadian bill will make investors indifferent between investing in the U.S.
bill and the Canadian bill.

a.
9.7%

b.
2.9%

c.
2.8%

d.
2.0%

38. The yield on a 1-year bill in the U.K. is 6% and the present exchange rate is 1
Pound = US $2.00. 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 __________.

a.
-3%

b.
3%

c.
3.35%

d.

8.72%

39. 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 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 __________.

a.
12.0%

b.
12.5%

c.
14.0%

d.
none of the above

40. 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 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
__________.

a.
10.96%

b.
12.25%

c.
13.42%

d.
15.50%

41. Inclusion of international equities in a U.S. investor's portfolio has historically

produced ___________________.

a.
lower returns and lower risk

b.
higher returns and lower risk

c.
lower returns and higher risk

d.
higher returns and higher risk

42. The correlation between diversified portfolios of U.S. stocks and the major
market indices of other industrial countries tends to be ____________.

a.
less than 0

b.
greater than 0

c.
less than 0.5

d.
greater than 0.5

43. WEBS are _____________.

a.
mutual funds marketed internationally on the internet

b.
synthetic domestic stock indices

c.
mutual funds that replicate the price and yield performance of foreign
stock markets

d.
None of the above

44. You are a U.S. investor who purchased British securities for 3,500 pounds one
year ago when the British pound cost $1.35. No dividends were paid on the
British securities in the past year. Your total return based in U.S. dollars was
__________ if the value of the securities is now 4,200 pounds and the pound is
worth $1.15.

a.
-3.8%

b.
2.2%

c.
5.6%

d.
15%

45. The correlation between the Wellville International Equity Fund and the EAFE
index is 1.00 The expected return on the EAFE index is 18%, the expected
return on the Wellville International Equity Fund is 25% and the risk-free
return in EAFE countries is 4%. Based on this analysis, the implied beta of
Wellville is __________.

a.
negative

b.
0.75

c.
0.82

d.
1.50

46. Suppose a U.S investor wishes to invest in a British firm currently selling for 50
per share. The investor has $7,000 to invest and the current exchange rate is
$1.40/.
Reference: Ref. 21-1

How many shares can the investor purchase?

a.
140

b.
100

c.
71.43

d.
none of the above

47. Suppose a U.S investor wishes to invest in a British firm currently selling for 50
per share. The investor has $7,000 to invest and the current exchange rate is
$1.40/.
Reference: Ref. 21-1

After one year, the exchange rate is unchanged and the share price is 55. What
is the dollar-denominated return?

a.
14%

b.
10%

c.
9.3%

d.
7.1%

48. Suppose a U.S investor wishes to invest in a British firm currently selling for 50
per share. The investor has $7,000 to invest and the current exchange rate is
$1.40/.
Reference: Ref. 21-1

After one year, the exchange rate is unchanged and the share price is 55. What
is the pound-denominated return?

a.

14%

b.
10%

c.
9.3%

d.
7.1%

49. Suppose a U.S investor wishes to invest in a British firm currently selling for 50
per share. The investor has $7,000 to invest and the current exchange rate is
$1.40/.
Reference: Ref. 21-1

After one year, the exchange rate is $1.60/. and the share price is 55. What is
the dollar-denominated return?

a.
25.7%

b.
16%

c.
14.3%

d.
9.3%

50. Suppose a U.S investor wishes to invest in a British firm currently selling for 50
per share. The investor has $7,000 to invest and the current exchange rate is
$1.40/.
Reference: Ref. 21-1

When is the dollar-denominated return equal to the pound denominated return?

a.
When the exchange rate is unchanged.

b.
When the share price is unchanged.

c.
When the stock is not sold.

d.
All of the above