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Exam 25: International Diversification

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Question 21

Multiple Choice

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An investor invests in a Japanese bond at 6.5% for one year. If the spot exchange rate is 110.00 yen per USD and the one year forward exchange rate is 112, what return should the investor expect on an equivalent USD investment?

A) 4.60%
B) 5.20%
C) 5.92%
D) 6.50%

E) A) and B)
F) None of the above

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Question 22

Multiple Choice

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__________ are mutual funds that invest in one country only.

A) ADRs
B) ECUs
C) Single-country funds
D) All of the options are correct.
E) None of the options are correct.

F) A) and E)
G) B) and E)

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Question 23

Multiple Choice

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International investing

An investor invests in a Mexican treasury at 9% for one year. The equivalent USA investment yields 5%. If the spot exchange rate is 13.000 pesos per USD, what is the expected forward exchange rate in pesos per USD?

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 150. 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

According to PRS, in 2016, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky) ?

The interplay between interest rate differentials and exchange rates, such that each adjusts until the foreign exchange market and the money market reach equilibrium, is called the

The performance of an internationally-diversified portfolio may be affected by

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

Home bias refers to

The manager of Cross Border Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: $\begin{array}{ccccc}&\text { EAFE } & \text { Return on } & \text { Currency } & \text { Cross } & \text { Manager's } \\&\text { Weight } & \text { Equity } & \text { Aplication } & \text { Border's } & \text { Return } \\&& \text { Index } & E_{1} / E_{0-1} & \text { Weight } &\\ \text { Eur } &0.30&10\%&10\%&0.25&9\%\\ \text { Aus } &0.10&5\%&-10\%&0.25&8\%\\ \text { FE } &0.60&15\%&30\%&0.50&16\%\\\end{array}$ Calculate Cross Border's stock selection return contribution.

Exchange-rate risk

__________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.

An investor invests in a Japanese bond at 5.5% for one year. The equivalent USA investment yields 3.8%. If the spot exchange rate is 110.00 yen per USD, what is the expected forward exchange rate in yen per USD?

Which equity index had the lowest volatility in terms of U.S. dollar-denominated returns for the period of five years ending in 2018?

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

The straightforward generalization of the simple CAPM to international stocks is problematic because

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

An investor invests in a Japanese bond at 6% for one year. The equivalent USA investment yields 7%. If the spot exchange rate is 104.00 yen per USD, what is the expected forward exchange rate in yen per USD?

The interest rate on a 1-year Canadian security is 7.8%. The current exchange rate is C$ = US $0.79. The 1-year forward rate is C$ = US $0.77. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is