Ch015 International Portfolio Investments.docx

Ch015 International Portfolio Investments.docx

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Ch015InternationalPortfolioInvestments

Eun&Resnick4e

CHAPTER15InternationalPortfolioInvestments

InternationalCorrelationStructureandRiskDiversification

OptimalInternationalPortfolioSelection

EffectsofChangesintheExchangeRate

InternationalBondInvestment

InternationalMutualFunds:

APerformanceEvaluation

InternationalDiversificationthroughCountryFunds

InternationalDiversificationwithADRs

InternationalDiversificationwithWEBS

InternationalFinanceinPractice:

LiveHere,InvestAbroad

InternationalDiversificationwithHedgeFunds

WhyHomeBiasinPortfolioHoldings?

InternationalFinanceinPractice:

Stay-at-HomeShareholders

Summary

MINICASE:

SolvingfortheOptimalInternationalPortfolio

Appendix15A:

InternationalInvestmentwithExchangeRiskHedging

Appendix15B:

SolvingfortheOptimalPortfolio

InternationalCorrelationStructureandRiskDiversification

1Inthecontextofinvestmentsinsecurities（stocksandbonds）,portfolioriskdiversificationrefersto:

a）thetime-honoredadage“Don’tputallyoureggsinonebasket”

b）investors’abilitytoreduceportfolioriskbyholdingsecuritiesthatarelessthanperfectlypositivelycorrelated

c）thefactthatthelesscorrelatedthesecuritiesinaportfolio,thelowertheportfoliorisk

d）alloftheabove

Answer:

d）

2Inthegraphatright,XandYrepresent

a）U.S.stocksandinternationalstocks

b）internationalstocksandU.S.stocks

c）systematicriskandunsystematicrisk

d）noneoftheabove

Answer:

a）

3

Youwillgetmorediversification

a）acrossindustriesthanacrosscountries

b）acrosscountriesthanacrossindustries

c）acrossstocksandbondsthanacrosscountries

d）noneoftheabove

Answer:

b）

4Systematicriskis:

a）nondiversifiablerisk

b）theriskthatremainsevenafterinvestorsfullydiversifytheirportfolioholdings

c）aandb

d）noneoftheabove

Answer:

c）

5The“worldbeta”measuresthe

a）unsystematicrisk

b）sensitivityofreturnsonasecuritytoworldmarketmovements

c）risk-adjustedperformance

d）riskofdefaultandbankruptcy

Answer:

b）

6Thelesscorrelatethesecuritiesinaportfolio,

a）Thelowertheportfoliorisk

b）Thehighertheportfoliorisk

c）Thelowertheunsystematicrisk.

d）Thehigherthediversifiablerisk.

Answer:

a）

7Regardingthemechanicsofinternationalportfoliodiversification,whichstatementistrue?

a）Securityreturnsaremuchlesscorrelatedacrosscountriesthanwithinacounty.

b）Securityreturnsaremorecorrelatedacrosscountriesthanwithinacounty.

c）Securityreturnsareaboutasequallycorrelatedacrosscountriesastheyarewithinacounty.

d）Noneoftheabove

Answer:

a）

8Systematicrisk

a）Isalsoknownasnon-diversifiablerisk.

b）Ismarketrisk

c）Referstotheriskthatremainsevenafterinvestorsfullydiversifytheirportfolioholdings.

d）Alloftheabove

Answer:

d）

9

AfullydiversifiedU.S.portfolioisabout

a）75percentasriskyasatypicalindividualstock.

b）27percentasriskyasatypicalindividualstock.

c）12percentasriskyasatypicalindividualstock.

d）Halfasriskyasafullydiversifiedinternationalportfolio

Answer:

b）

10Studiesshowthatinternationalstockmarketstendtomovemorecloselytogetherwhenthevolatilityishigher.Thisfindingsuggeststhat

a）Investorsshouldliquidatetheirportfolioholdingsduringturbulentperiods.

b）Sinceinvestorsneedriskdiversificationmostpreciselywhenmarketsareturbulent,theremaybelessbenefittointernationaldiversificationforinvestorswholiquidatetheirportfolioholdingsduringturbulentperiods.

c）Thiskindofcorrelationiswhyinternationalportfoliodiversificationissmartfortoday’sinvestor.

d）Noneoftheabove

Answer:

b）

OptimalInternationalPortfolioSelection

11The“Sharpeperformancemeasure”（SHP）is:

a）a“risk-adjusted”performancemeasure

b）theexcessreturn（aboveandbeyondtherisk-freeinterestrate）perstandarddeviationrisk

c）thesensitivitylevelofanationalmarkettoworldmarketmovements

d）a）andb）

Answer:

d）

12Withregardtoestimatesof“worldbeta”measuresofthesensitivityofanationalmarkettoworldmarketmovements,

a）TheJapanesestockmarketisthemostsensitivetoworldmarketmovements

b）TheU.S.stockmarketistheleastsensitivetoworldmarketmovements

c）Botha）andb）

d）Noneoftheabove

Answer:

c）

13The“Sharpeperformancemeasure”（SHP）is:

a）

b）

c）

d）noneoftheabove

Answer:

a）

14Themeanandstandarddeviation（SD）ofmonthlyreturns,overagivenperiodoftime,forthestockmarketsoftwocountries,XandYare

Country

Mean（%）

SD（%）

X

1.57

4.87

Y

1.92

7.64

Assumingthatthemonthlyrisk-freeinterestrateis0.25%,theSharpeperformancemeasures,SHP（X）andSHP（Y）,andtheperformanceranks,respectively,forXandYare:

a）SHP（X）=0.271,rank=1,andSHP（Y）=0.219,rank=2

b）SHP（X）=0.271,rank=2,andSHP（Y）=0.219,rank=1

c）SHP（X）=18.84,rank=1,andSHP（Y）=23.04,rank=2

d）SHP（X）=23.04,rank=2,andSHP（Y）=18.84,rank=1

Answer:

a）

15WithregardtotheOIP

a）Thecompositionoftheoptimalinternationalportfolioisidenticalforallinvestors,regardlessofhomecountry.

b）Thecompositionoftheoptimalinternationalportfolioarevariesdependinguponthenumerairecurrencyusedtomeasurereturns.

c）Thecompositionoftheoptimalinternationalportfolioisidenticalforallinvestors,regardlessofhomecountry,iftheyhedgetheirriskwithcurrencyfuturescontracts.

d）Bothb）andc）

Answer:

b）

EffectsofChangesintheExchangeRate

16EmeraldEnergyisanoilexplorationandproductioncompanythattradesontheLondonstockmarket.Assumethatwhenpurchasedbyaninternationalinvestorthestock’spriceandtheexchangeratewere£5and£0.64/$1.00respectively.Atsellingtime,oneyearafterthepurchasedate,theywere£6and£0.60/$1.00.Calculatetheinvestor’sannualpercentagerateofreturnintermsoftheU.S.dollars.

a）0.20%

b）20.00%

c）1.28%

d）28.00%

Answer:

d）

Rationale:

17

EmeraldEnergyisanoilexplorationandproductioncompanythattradesontheLondonstockmarket.Overthepastyear,thestockhasenjoyeda20percentreturninpoundterms,butoverthesameperiod,theexchangeratehasfallenfrom$2.00=£1to$1.80=£1.Calculatetheinvestor’sannualpercentagerateofreturnintermsoftheU.S.dollars.

a）3.5%

b）9.25%

c）8%

d）Thereisnotenoughinformationtocomputetheinvestor’sannualpercentagerateofreturnintermsoftheU.S.dollars.

Answer:

c）

Rationale:

Thecurrencyreturnisgivenby

Usingequation15.4wehavethedollar-denominatedreturnonthestockas:

Ri$=Ri+ei+Ri×ei=20%–10%–2%=8%

18EmeraldEnergyisanoilexplorationandproductioncompanythattradesontheLondonstockmarket.Overthepastyear,thestockhasgonefrom£50pershareto£55,butoverthesameperiod,thedollarhasdepreciatedtenpercent.Calculatetheinvestor’sannualpercentagerateofreturnintermsoftheU.S.dollars.

a）3.5%

b）–.01%

c）0%

d）Thereisnotenoughinformationtocomputetheinvestor’sannualpercentagerateofreturnintermsoftheU.S.dollars.

Answer:

b）

Rationale:

Thepound-denominatedstockreturnis10%

Usingequation15.4wehavethedollar-denominatedreturnonthestockas:

Ri$=Ri+ei+Ri×ei=10%–10%–.01%=–.01%

19TherealizeddollarreturnsforaU.S.residentinvestinginaforeignmarketwilldependonthereturnintheforeignmarketaswellasontheexchangeratefluctuationsbetweenthedollarandtheforeigncurrency.

Calculatethevarianceofthemonthlyrateofreturnindollarterms,ifthevarianceoftheforeignmarket’sreturn（intermsofitsowncurrency）is1.14,thevariancebetweentheU.S.dollarandtheforeigncurrencyis17.64,thecovarianceis2.34,andthecontributionofthecross-producttermis0.04.

a）21.16

b）23.50

c）26.89

d）28.65

Answer:

b）

Rationale:

Equation15.5:

Var（Ri$）=1.14+17.64+2×2.34+0.04=23.50

20

EmeraldEnergyisanoilexplorationandproductioncompanythattradesontheLondonstockmarket.Assumethatwhenpurchasedbyaninternationalinvestorthestock’spriceandtheexchangeratewere£5and£0.64/$1.00respectively.Atsellingtime,oneyearafterpurchase,theywere£6and£0.60/$1.00.Iftheinvestorhadsold£5,theprincipalinvestmentamountatthesametimethatthestockwaspurchased,forwardattheforwardexchangerateof£0.60/$1.00.Thedollarrateofreturnwouldbe:

a）0.26%

b）26.00%

c）28.00%

d）30.00%

Answer:

b）

Rationale:

Findthedollar-basecostbasisattimezeroanddollar-basedvaluesattimeone:

21Assumethatyouhaveinvested$100,000inBritishequities.Whenpurchasedthestock’spriceandtheexchangeratewere£50and£0.50/$1.00respectively.Atsellingtime,oneyearafterpurchase,theywere£60and£0.60/$1.00.Iftheinvestorhadsold£50,000forwardattheforwardexchangerateof£0.55/$1.00.Thedollarrateofreturnwouldbe:

a）10.90%

b）7.58%

c）28.00%

d）9.09%

Answer:

b）

Rationale:

Findthedollar-basecostbasisattimezeroanddollar-basedvaluesattimeone:

22

Assumethatyouhaveinvested$100,000inBritishequities.Whenpurchasedthestock’spriceandtheexchangeratewere£50and£0.50/$1.00respectively.Atsellingtime,oneyearafterpurchase,theywere£45and£0.60/$1.00.Iftheinvestorhadsold£50,000forwardattheforwardexchangerateof£0.55/$1.00.Thedollarrateofreturnwouldbe:

a）–27.27%

b）1.09%

c）28.00%

d）–9.09%

Answer:

a）

Rationale:

Findthedollar-basecostbasisattimezeroanddollar-basedvaluesattimeone:

23Assumethatyouhaveinvested$100,000inJapaneseequities.Whenpurchasedthestock’spriceandtheexchangeratewere¥100and¥100/$1.00respectively.Atsellin