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Multiple Choice Quiz
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1
The __________ index is a widely used index of non-U. S. stocks.
A)CBOE
B)Dow Jones
C)EAFE
D)all of the above
E)none of the above
2
The __________ equity market had the highest average local currency return between 2001 and 2005.
A)Russian
B)Norwegian
C)U. K.
D)U. S.
E)none of the above
3
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
A)-6.7%
B)0%
C)8%
D)1.25%
E)none of the above
4
The performance of an internationally diversified portfolio may be affected by
A)currency selection.
B)country selection.
C)stock selection.
D)all of the above
E)none of the above
5
The straightforward generalization of the simple CAPM to international stocks is problematic because
A)taxes, transaction costs, and capital barriers across countries make it difficult for investor to hold a world index portfolio.
B)investors in different countries view exchange rate risk from the perspective of different domestic currencies.
C)inflation risk perceptions by different investors in different countries will differ as consumption baskets differ.
D)all of the above
E)none of the above
6
The major concern that has been raised with respect to the weighting of countries within the EAFE index is
A)currency volatilities are not considered in the weighting.
B)the weights are not proportional to the asset bases of the respective countries.
C)inflation is not represented in the weighting.
D)cross-correlations are not considered in the weighting.
E)none of the above
7
Exchange rate risk
A)results from changes in the exchange rates in the currencies of the investor and the country 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 B
E)A, B and C.
8
Foreign index funds such as WEBS may be more useful as diversification tools than closed-end funds or ADRS because
A)they are well-diversified and continuously priced.
B)they have similar expense ratios to open-end country funds.
C)they sell at a discount to net asset value.
D)they are actively managed.
E)all of the above
9
In the long run, diversifying into international markets is most likely to benefit U.S. investors
A)under all U. S. market conditions.
B)when U.S. markets are performing well.
C)when U.S. markets are performing poorly.
D)under no circumstances.
E)only when currency risk is hedged.
10
When an investor adds international stocks to her portfolio
A)it will raise her risk relative to the risk she would face just holding U.S. stocks.
B)she needs to seek professional management because she doesn't have access to international stocks on her own.
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 can reduce its risk relative to the risk she would face just holding U.S. stocks.





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