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| 1 | |
Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent pound sterling denominated return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. What is your dollar-denominated percentage return? |
| | A) | 55 percent loss |
| | B) | 45 percent gain |
| | C) | 42.5 percent loss |
| | D) | Weakness in the dollar |
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| 2 | |
A U.S.-based investor has just traded his dollars for euros to invest in 1,000 shares of a German company at €50 per share. In one year, he expects his stock to be worth €60 per share. His investment horizon is one year and he does not wish to face exchange rate risk, so he sells €60,000 forward. What risk(s) does he face? The spot and forward exchange rate is €1.00 = $1.00. |
| | A) | He faces the not-inconsequential risk that his shares may decline in value and the risk that the exchange rate could change. |
| | B) | His only risk is that his shares decline in value, since he has hedged his exchange rate risk. |
| | C) | He is exposed to the risk that the dollar could weaken. |
| | D) | He is exposed to the risk that his shares could go higher than €60. |
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| 3 | |
The business cycles in different countries are often: |
| | A) | In synch with each other (almost perfectly correlated) due to the integrated nature of capital markets. |
| | B) | Highly, but not perfectly correlated. |
| | C) | asynchronous |
| | D) | uncorrelated |
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| 4 | |
Consider the following data in U.S. dollar terms:| Stock Market | Mean Return | Standard Deviation | | U.S. | 1.3% per month | 5% | | U.K. | 1.0% per month | 4% |
The correlation coefficient between the two markets is 0.20. Note that the U.K. stock market has lower returns, but lower risk. Suppose that you invest half of your money in each market. What is your expected return and standard deviation? |
| | A) | 1.15 percent per month expected return; standard deviation of 3.5% |
| | B) | Expected return of 1.15 percent per month; standard deviation of 4.5% |
| | C) | Expected return of 1.15 percent per month; standard deviation of 31.8% |
| | D) | Expected return of 1.15 percent per month; standard deviation of 0.12% |
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| 5 | |
Systematic risk refers to |
| | A) | The risk that remains even after investors fully diversify their portfolio holdings |
| | B) | The risk that unanticipated changes in the exchange rate may reduce the diversification potential of international investing. |
| | C) | The increase in risk that international diversification offers to domestic portfolios. |
| | D) | None of the above |
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| 6 | |
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| | A) | "A" represents international stocks; "B" represents U.S. stocks. |
| | B) | "A" is U.S. stocks; "B" represents international stocks. |
| | C) | "A" represents total risk; "B" represents systematic risk. |
| | D) | None of the above |
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| 7 | |
When exchange rate risk is hedged using forward contracts, international bond portfolios tend to ___________ international stock portfolios in terms of risk-return efficiency. |
| | A) | lag behind |
| | B) | behave the same as |
| | C) | dominate |
| | D) | None of the above |
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| 8 | |
Many investors' portfolios exhibit home bias |
| | A) | As a reflection of excessive transaction/information costs |
| | B) | As a reflection of imperfections in the international financial markets. |
| | C) | As a reflection of discriminatory taxes for foreigners |
| | D) | All of the above are correct |
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| 9 | |
Empirical evidence suggests that |
| | A) | Foreign investors are better off when investing in the U.S., but U.S. investors do not benefit from international diversification. |
| | B) | U.S.-based international mutual funds do not provide international diversification to U.S. investors. |
| | C) | Any benefits from international diversification are washed away by exchange rate risk. |
| | D) | Regardless of domicile and the numeraire currency used to measure returns, investors can capture extra returns when they hold their optimal international portfolios. |
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| 10 | |
Suppose you observe the following exchange rates: S($/€) = 0.85 (i.e. €1 = $.85) The one-year forward rate is F1($/€) = 0.935 (i.e. €1 = $.935) The risk-free interest rate in the U.S. is 5% and in Germany it is 2%. How can a dollar-based investor make money? |
| | A) | Borrow dollars in the U.S., exchange for euros, invest in Germany, in one year, translate the euros back into dollars at the forward rate. |
| | B) | Borrow euros, translate into dollars at the spot, invest in the U.S. at 5% for one year. At the end of the year, translate part of your dollar investment back into euros at the forward rate to repay your euro debt. |
| | C) | There are no profitable arbitrage opportunities. |
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