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Exam 25: International Diversification

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Question 21

Multiple Choice

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Suppose the 1-year risk-free rate of return in Canada.is 4.5% and the 1-year risk-free rate of return in Britain is 7.7%.The current exchange rate is 1 pound = Cad.$1.60.A 1-year future exchange rate of __________ for the pound would make a Canadian investor indifferent between investing in the Canadian security and investing in the British security.

A) 1.5525
B) 2.0411
C) 1.7500
D) 2.3369

E) All of the above
F) A) and B)

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Question 22

Multiple Choice

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__________ 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

E) A) and B)
F) B) and D)

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Question 23

Multiple Choice

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The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's stock selection return contribution.

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

The present exchange rate is C$ = U.S.$0.78.The 1-year future rate is C$ = 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 an investor indifferent between investing in the U.S.bill and the Canadian bill.

WEBS portfolios

The manager of Quantitative International Fund uses EAFE as a benchmark.Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's country selection return contribution.

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

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%. 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

Which country has the largest stock market compared to GDP?

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

Suppose the 1-year risk-free rate of return in Canada is 4% and the 1-year risk-free rate of return in Britain is 6%.The current exchange rate is 1 pound = Cad.$1.67.A 1-year future exchange rate of __________ for the pound would make a Canadian investor indifferent between investing in the Canadian security and investing in the British security.

Exchange-rate risk

In 2015, the U.S.equity market represented __________ of the world equity market.

Which equity index had the lowest volatility in terms of U.S.dollar-denominated returns for the period of five years ending in October 2016?

Home bias refers to

The EAFE is

Which country has the highest in GDP per capita?

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

Which equity index had the highest volatility in terms of U.S.dollar-denominated returns for the period of five years ending in October 2016?