Chap 019

Chapter 19 - Globalization and International Investing
Chapter 19
Globalization and International Investing

Multiple Choice Questions

1. In 2007, U.S. secrities represented !!!!!! o" the #orld $ar%et "or e&ities.
'. less than 2()
*. $ore than 2+,
C. bet#een ,0) and -0)
.. a consistent (0)

2. !!!!! has the largest n$ber o" listed corporations a$ong developed $ar%ets.
'. /he United States
*. 0apan
C. /he United 1ingdo$
.. S#itzerland

,. /otal capitalization o" corporate e&it2 in the U.S. at the beginning o" 2009 #as abot
!!!!!!! trillion.
'. 310
*. 320
C. 3,0
.. 3-0

-. I" 2o li$it 2or invest$ent opportnit2 set to onl2 the largest si4 contries in the #orld in
ter$s o" e&it2 capitalization as a percentage o" total global e&it2 capital 2o #ill inclde
abot !!!!!!! o" the #orld5s e&it2.
'. ,()
*. -()
C. (()
.. 6()

19-1
(. 7i$iting 2or invest$ents to the top si4 contries in the #orld in ter$s o" $ar%et
capitalization $a2 $a%e sense "or a+an !!!!!!!!! investor bt probabl2 does not $a%e sense
"or a+an !!!!!!!! investor.
'. active8 passive
*. passive8 active
C. secrit2 selection e4pert8 $ar%et ti$er
.. "nda$ental8 technical

6. 9:*S are !!!!!!!!!!!!!!!!!!!!.
'. invest$ents in contr2 speci"ic port"olios
*. traded e4actl2 li%e $tal "nds
C. identical to '.;s
.. designed to give investors "oreign crrenc2 e4posre to $ltiple contries

7. 9hich one o" the "ollo#ing allo#s 2o to prchase stoc% o" a speci"ic "oreign co$pan2<
'. 9:*S
*. =SCI
C. '.;
.. :'>:

?. Generall2 spea%ing, contries #ith !!!!!! capitalization o" e&ities have !!!!!!!!.
'. larger8 higher G.@
*. s$aller8 #ealthier
C. larger8 s$aller G.@
.. larger8 higher gro#th contries

9. 2( contries #ith largest e&it2 capitalization $ade p abot !!!!! o" the #ord G.@ in
2007.
'. 22)
*. --)
C. 7()
.. ?()

19-2
10. 'ccording to a regression o" $ar%et cap on G.@ virtall2 all contries #ithot $aAor oil
revenes that restrict private sector gro#th and+or s""er "ro$ $aAor political stri"e #ind p
#ith !!!!!!! per capita G.@ than+as predicted b2 the regression.
'. higher
*. lo#er
C. e&al
.. so$eti$es lo#er and so$eti$es higher

11. '$ong the "actors e4plaining the retrn on a stoc%, !!!!!!! "actors are generall2 $ost
i$portant #hile !!!!!!! "actors are generall2 least i$portant.
'. do$estic8 indstrial
*. do$estic8 crrenc2
C. #orld8 indstrial
.. crrenc28 do$estic

12. :'>: stands "or !!!!!!!.
'. :&it2 'nd >oreign :4change
*. :ropean, 'stralian, >ar :ast
C. :ropean, 'sian, >oreign :4change
.. :ropean, '$erican, >ar :ast

1,. 9hich one o" the "ollo#ing contr2 ris%s re"ers to the possibilit2 o" e4propriation o"
assets, changes in ta4 polic2 and the possibilit2 o" restrictions on "oreign e4change
transactions<
'. .e"alt ris%
*. >oreign e4change ris%
C. =ar%et ris%
.. @olitical ris%

1-. /he !!!!!!!!!! inde4 is a #idel2 sed inde4 o" non-U.S. stoc%s.
'. C*B:
*. .o# 0ones
C. :'>:
.. 7eh$an Inde4

19-,
1(. Sppose that U.S. e&it2 $ar%ets represent abot ,() o" total global e&it2 $ar%ets and
that the t2pical U.S. investor has abot 9() o" their port"olio invested onl2 in U.S. e&ities.
/his is an e4a$ple o" !!!!!!!!!.
'. ho$e contr2 bias
*. e4cessive diversi"ication
C. active $anage$ent
.. passive $anage$ent

16. >or largest econo$ies in the #orld in 2007 #ere !!!!!!!!!!!!.
'. U.S., India, China, and 0apan
*. U.S., China, Canada, and 0apan
C. U.S., 0apan, Ger$an2, and China
.. China, U1, Canada, and U.S.

17. /he proper "or$la "or interest rate parit2 is given b2 !!!!!!!!!!!.
'. C1 D r
"
C"orEE+C1 D r
"
CUSEE F >
1
+:
0
*. C1 D r
"
CUSEE+C1 D r
"
C"orEE F :
0
+>
1
C. C1 D r
"
CUSEE+C1 D r
"
C"orEE F >
0
+:
0
.. C1 D r
"
C"orEE+C1 D r
"
C"orEE F >
0
+:
1

1?. ;esearch indicates that that e4change ris% o" the $aAor crrencies has been !!!!!!!!!
over ti$e.
'. relativel2 stable
*. increasing rapidl2
C. declining slightl2
.. declining rapidl2

19. It appears "ro$ e$pirical #or% that e4change rate ris% is !!!!!!!!!!!!.
'. declining "or individal invest$ents in recent 2ears
*. $ostl2 diversi"iable
C. $ostl2 s2ste$atic ris%
.. ni$portant "or an invest$ent in a single "oreign contr2

19--
20. @assive investors #ith #ell-diversi"ied international port"olios !!!!!!!!!.
'. can sa"el2 ignore all political ris% in e$erging $ar%ets
*. can e4pect ver2 large diversi"ication gains "ro$ their international investing
C. do not need to be concerned #ith hedging e4posre to "oreign crrencies
.. can e4pect retrns to be better than the :'>: on a consistent basis

21. /he annal standard deviation o" an asset5s retrns is 1(). 9hat is the standard deviation
o" the average annal retrn on a "ive 2ear invest$ent in this asset, ass$ing there is no serial
correlation in the retrns<
'. 7(.00)
*. ,,.(-)
C. 1(.00)
.. 6.71)

22. /he correlation coe""icient bet#een the U.S. stoc% $ar%et inde4 and stoc% $ar%et indices
o" $aAor contries is !!!!!!!!!!.
'. bet#een -1 and -0.(0
*. bet#een -0.(0 and 0.00
C. bet#een 0.00 and 0.(0
.. bet#een 0.(0 and 1

2,. In 2007, the !!! contries #ith the largest capitalization o" e&ities $ade p
appro4i$atel2 60) o" the #orld e&it2 port"olio.
'. 2
*. -
C. 6
.. 12

2-. Investor port"olios are notoriosl2 over #eighted in ho$e contr2 stoc%s. /his is
co$$onl2 called !!!!!!!!.
'. local "at
*. nativis$
C. ho$e contr2 bias
.. $isleading representation

19-(
2(. Corrption is aCnE !!!!!!!!! ris% variable.
'. "ir$ speci"ic
*. political
C. "inancial
.. econo$ic

26. ' U.S. hedge "nd o#ns S#iss "ranc bonds. /he "nd $anager believes that i" S#iss
interest rates rise relative to U.S. interest rates the vale o" the "ranc #ill rise. /o li$it the ris%
to the "nd5s dollar retrn, the "nd $anager shold !!!!!!!!!!.
'. sell the S#iss "ranc bonds no#
*. sell the S#iss "ranc "or#ard
C. probabl2 do nothing becase the "ranc $ove #ill o""set the lo#er bond price
.. enter into an interest rate s#ap to pa2 variable and receive "i4ed

27. 'nnal in"lation rate is aCnE !!!!!!! ris% variable.
'. "ir$ speci"ic
*. political
C. "inancial
.. econo$ic

2?. ' U.S. insrance "ir$ $st pa2 G7(,000 in 6 $onths. /he spot e4change rate is 31.,2 per
ero and in 6 $onths the e4change rate is e4pected to be 31.,(. /he 6 $onth "or#ard rate is
crrentl2 31.,6 per ero. I" the insrer5s goal is to li$it its ris% shold the insrer hedge this
transaction< I" so ho#<
'. /he insrer need not hedge becase the e4pected e4change rate $ove #ill be "avorable.
*. /he insrer shold hedge b2 b2ing ero "or#ard even thogh this #ill cost $ore than the
e4pected cost o" not hedging.
C. /he insrer shold hedge b2 selling ero "or#ard becase this #ill cost less than the
.. /he insrer shold hedge b2 b2ing ero "or#ard even thogh this #ill cost less than the

19-6
29. ' "nd has assets deno$inated in eros and liabilities in 2en de in si4 $onths. /he si4
$onth "or#ard rate "or ero is 31.,6 per ero and the si4 $onth "or#ard rate "or the 2en is
121 2en per dollar. /he si4 $onth "or#ard rate "or the ero verss the 2en shold be
!!!!!!!! per ero.
'. H??.97
*. H1-(.,-
C. H1(-.67
.. H16-.(6

,0. Io invest in varios broadl2 diversi"ied international $tal "nds as #ell as 2or U.S.
port"olio. /he one ris% 2o probabl2 don5t have to #orr2 abot a""ecting 2or retrns is
!!!!!!!!!!.
'. bsiness c2cle ris%
*. beta ris%
C. in"lation ris%
.. crrenc2 ris%

,1. 'ccording to the International Contr2 ;is% Gide in 200?, #hich o" the "ollo#ing
contries #as the ris%iest according to the crrent co$posite ris% rating<
'. 0apan
*. United States
C. China
.. India

,2. Sppose the 6 $onth ris%-"ree rate o" retrn in the US' is (). /he crrent e4change rate
is 1 @ond F US 32.0(. /he 6 $onth "or#ard rate is 1 @ond F US 32.00. /he $ini$$ 2ield
on a 6 $onth ris%-"ree secrit2 in *ritain that #old indce a U.S. investor to invest in the
*ritish secrit2 is !!!!!!!!.
'. (.06)
*. 6.7-)
C. ?.-?)
.. 10.1,)

19-7
,,. /he &oted interest rate on a , $onth Canadian secrit2 is ?). /he crrent e4change rate
is C 31 F US 30.6?. /he , $onth "or#ard rate is C 31 F US 30.70. /he '@; Cdeno$inated in
US3E that a U.S. investor can earn b2 investing in the Canadian secrit2 is !!!!!!!!!!.
'. (.00)
*. 7.2()
C. 20.00)
.. 22.-,)

,-. Sppose the 1-2ear ris%-"ree rate o" retrn in the US' is () and the 1-2ear ris%-"ree rate
o" retrn in *ritain is ?). /he crrent e4change rate is 31 F J0.(0. '
1-2ear "tre e4change rate o" !!!!!!!!!! #old $a%e a U.S. investor indi""erent bet#een
investing in the U.S. secrit2 and investing in the *ritish secrit2.
'. J0.(1(0
*. J0.(1-2
C. J0.(12,
.. J0.-?(9

,(. /he ris%-"ree interest rate in the US is -) #hile the ris%-"ree interest rate in the U1 is 9).
I" the *ritish pond is #orth 32.00 in the spot $ar%et, a 1-2ear "tres rate on the *ritish
pond shold be #orth !!!!!!!!!!.
'. 31.?,
*. 31.91
C. 32.0?
.. 32.1?

,6. /he ris%-"ree interest rate in the US is ?) #hile the ris%-"ree interest rate in the U1 is
1(). I" the 1-2ear "tres price on the *ritish pond is 32.-0, the spot $ar%et vale o" the
*ritish pond toda2 shold be !!!!!!!!!!.
'. 31.9,
*. 32.22
C. 32.(6
.. 32.76

19-?
,7. /he present e4change rate is C 31 F US 30.77. /he 1-2ear "tre rate is C 31 F US 30.7,.
/he 2ield on a 1-2ear U.S. bill is -). ' 2ield o" !!!!!!!!!! on a 1-2ear Canadian bill #ill
$a%e investors indi""erent bet#een investing in the U.S. bill and the Canadian bill.
'. 9.7)
*. 2.9)
C. 2.?)
.. 2.0)

,?. /he 2ield on a 1-2ear bill in the U.1. is 6) and the present e4change rate is 1 @ond F US
32.00. I" 2o e4pect the e4change rate to be 1 @ond F US 31.9( a 2ear "ro$ no#, the retrn a
U.S. investor can e4pect to earn b2 investing in U.1. bills is appro4i$atel2 !!!!!!!!!!.
'. -,)
*. ,)
C. ,.,()
.. ?.72)

,9. 'ss$e there is a "i4ed e4change rate bet#een the Canadian and U.S. dollar. /he
e4pected retrn and standard deviation o" retrn on the U.S. stoc% $ar%et are 1,) and 1()
respectivel2. /he e4pected retrn and standard deviation o" retrn on the Canadian stoc%
$ar%et are 12) and 16) respectivel2. /he covariance o" retrns bet#een the U.S. and
Canadian stoc% $ar%ets is 1.2). I" 2o invested (0) o" 2or $one2 in the Canadian stoc%
$ar%et and (0) in the U.S. stoc% $ar%et, the e4pected retrn on 2or port"olio #old be
!!!!!!!!!!.
'. 12.0)
*. 12.()
C. 1-.0)
.. 1(.()

19-9
-0. 'ss$e there is a "i4ed e4change rate bet#een the Canadian and U.S. dollar. /he
e4pected retrn and standard deviation o" retrn on the U.S. stoc% $ar%et are 10) and 1()
Canadian stoc% $ar%ets is .012. I" 2o invested (0) o" 2or $one2 in the Canadian stoc%
$ar%et and (0) in the U.S. stoc% $ar%et, the standard deviation o" retrn on 2or port"olio
#old be !!!!!!!!!!.
'. 10.96)
*. 12.2()
C. 1,.-2)
.. 1(.(0)

-1. Inclsion o" international e&ities in a U.S. investor5s port"olio has historicall2 prodced
!!!!!!!!!!!!!!!!!!!.
'. a sbstantiall2 redced port"olio variance
*. a slightl2 redced port"olio variance
C. a sbstantiall2 poorer port"olio variance
.. a slightl2 poorer port"olio variance

-2. 9:*S are !!!!!!!!!!!!!.
'. $tal "nds $ar%eted internationall2 on the Internet
*. s2nthetic do$estic stoc% indices
C. e&it2 indices that replicate the price and 2ield per"or$ance o" "oreign stoc% port"olios
.. single stoc% invest$ents in a "oreign secrit2

-,. Io are a U.S. investor #ho prchased *ritish secrities "or ,,(00 ponds one 2ear ago
#hen the *ritish pond cost 31.,(. Ko dividends #ere paid on the *ritish secrities in the
past 2ear. Ior total retrn based in U.S. dollars #as !!!!!!!!!! i" the vale o" the secrities
is no# -,200 ponds and the pond is #orth 31.1(.
'. -,.?)
*. 2.2)
C. (.6)
.. 1()

19-10
--. ;eal U.S. interest rates $ove above 0apanese interest rates. I" 2o believe that 0apanese
interest rates #on5t $ove and 2o believe that interest rate parit2 #ill hold then
!!!!!!!!!!!!.
'. the 2en per dollar e4change rate shold rise
*. the dollar per 2en e4change rate shold rise
C. the e4change rate shold sta2 the sa$e i" parit2 holds
.. one can5t predict the e4change rate change "ro$ the in"or$ation given

Sppose a U.S. investor #ishes to invest in a *ritish "ir$ crrentl2 selling "or J(0 per share.
/he investor has 37,000 to invest and the crrent e4change rate is 31.-0+J.

-(. Lo# $an2 shares can the investor prchase<
'. 1-0
*. 100
C. 71.-,
.. none o" the above

-6. '"ter one 2ear, the e4change rate is nchanged and the share price is J((. 9hat is the
dollar-deno$inated retrn<
'. 1-)
*. 10)
C. 9.,)
.. 7.1)

pond-deno$inated retrn<
'. 1-)
*. 10)
C. 9.,)
.. 7.1)

19-11
-?. '"ter one 2ear, the e4change rate is 31.60+J and the share price is J((. 9hat is the dollar-
deno$inated retrn<
'. 2(.7)
*. 16)
C. 1-.,)
.. 9.,)

-9. '"ter one 2ear, the e4change rate is 31.(0+J and the share price is J-(. Lo# $ch o" 2or
dollar-deno$inated retrn is de to the crrenc2 change<
'. 10.00)
*. 6.-,)
C. -.,-)
.. 2.12)

(0. Io "ind that the e4change rate &ote "or the 2en is 121 2en per dollar. /his is an e4a$ple
o" a+an !!!!!!!! &ote. Io also "ind that the ero is #orth 31.,,. /his second &ote is an
e4a$ple o" a+an !!!!!!! &ote.
'. direct8 indirect
*. indirect8 direct
C. "oreign8 U.S.
.. U.S.8 "oreign

(1. '$ong e$erging contries the largest e&it2 $ar%et in 2007 #as located in
!!!!!!!!!!!!!.
'. China
*. India
C. *razil
.. ;ssia

19-12
(2. In the @;S contr2 co$posite ris% ratings a score o" !!!!!! represents the least ris%2 and
a score o" !!!!! represents the $ost ris%2.
'. 08 100
*. 08 (0
C. (08 0
.. 1008 0

(,. 9hich e$erging contr2 has the highest percentage gro#th in $ar%et capitalization<
'. *razil
*. China
C. /ai#an
.. /r%e2

(-. /he dollar per ero spot rate is 1.2 #hen an i$porter o" >rench #ines places an order. 6
$onths later, #hen she ta%es deliver2, the spot rate is 1., dollars per ero. I" her original
invoice #as "or ,0,000 ero, #hat is her gain or loss de to e4change rate ris%<
'. 3,,000 gain
*. 3,,000 loss
C. 36,000 loss
.. no gain or loss

((. 'n i$porter o" televisions "ro$ 0apan has a contract to prchase a ship$ent o" televisions
"or 2,000,000 2en. /he spot rate increases "ro$ 10( 2en per dollar to 10? 2en per dollar. 9hat
is the i$porter5s gain or loss<
'. 3(29 gain
*. 3(29 loss
C. 3619 gain
.. 3619 loss

19-1,
(6. ' contr2 has a @;S political ris% rating o" 7(, a "inancial score o" -0 and an econo$ic
score o" ,(. /he contr25s co$posite rating is !!!!!!!!!.
'. 7(
*. (0
C. -0
.. ,(

(7. /he ris% "ree rate in the US is 2.() and the ris% "ree rate in :rope is ,.2). I" the spot
rate o" dollars per ero is 1.,2, #hat is the li%el2 "or#ard rate in ter$s o" dollars per ero<
'. 1.,0
*. 1.,1
C. 1.,2
.. 1.,,

(?. /he ris% "ree rate in the US is -.0) and the ris% "ree rate in 0apan is 1.2). I" the spot rate
o" 2en to dollars is 10(, #hat is the li%el2 2en per dollar "or#ard rate<
'. 101
*. 102
C. 10(
.. 10?

(9. /he 2en per dollar spot rate is 10-. /he 2en per dollar "or#ard rate is 107. I" the US ris%
"ree rate is 2.-), #hat is the li%el2 2en ris% "ree rate<
'. 1.2-)
*. 2.,()
C. ,.9?)
.. (.,()

19-1-
60. In the @;S "inancial ris% ratings the U.S. rates poorl2 becase o" the U.S. e4periences
!!!!!!!!.
I. large bdget de"icit
II. large trade de"icit
III. large a$ont o" total debt
'. I onl2
*. I and II onl2
C. I and III onl2
.. I, II and III

61. /he $aAor participants #ho directl2 prchase secrities in the capital $ar%ets o" other
contries are predo$inantl2 !!!!!!!!!!!!.
'. large instittional investors
*. individal investors
C. govern$ent agencies
.. central ban%s

62. B" the "ollo#ing, #hich is the $ost co$$onl2 sed international inde4<
'. .0I'
*. :'>:
C. ;ssell 2000
.. SM@(00

6,. 9:*S di""er "ro$ $tal "nds in that !!!!!!!!!!.
I. Shares o" 9:*S can be shorted
II. 9:*S shares trade continosl2 on the '=:N
III. 9:*S are passivel2 $anaged
'. II onl2
*. II and III onl2
C. I and III onl2
.. I, II and III

19-1(
6-. /he variation in betas o" e$erging $ar%ets sggests that !!!!!!!!!!!!.
'. e$erging $ar%ets are $ore ni"or$ than developed $ar%ets
*. beta does not hold in international $ar%ets
C. international diversi"ication $a2 redce port"olio ris%
.. ris%ier e$erging $ar%ets have ni"or$l2 lo#er betas

6(. Bne 2ear U.S. interest rates are () and :ropean interest rates are 7). /he spot ero
direct e4change rate &ote is 1.,2 and the one 2ear "or#ard rate direct &ote is 1.,(. I" 2o
have 31 $illion dollars or G 1 $illion to start #ith #hat #old be 2or dollar pro"its "ro$ an
interest arbitrage based on this data<
'. 39-,,22
*. 3((,,-(
C. 3--,,1?
.. 3,,,(9(

66. Bne 2ear U.S. interest rates are 7) and :ropean interest rates are (). /he spot ero
direct e4change rate &ote is 1.,0 and the one 2ear "or#ard rate direct &ote is 1.2(. I" 2o
'. 360,,?-
*. 3-2,97,
C. 36?,-22
.. 37?,(00

'll e4change rates are e4pressed as nits o" "oreign crrenc2 that can be prchased #ith one
U.S. dollar. 'ns#er the "ollo#ing &estions abot deco$posing the $anager5s per"or$ance.

19-16
67. 9hat is the di""erence in retrn o" the $anager5s port"olio de to crrenc2 selection<
'. -()
*. -,)
C. 2)
.. 1)

6?. 9hat is the di""erence in retrn o" the $anager5s port"olio de to contr2 selection<
'. -0.60)
*. -0.7()
C. 0.12)
.. 0.22)

69. 9hat is the di""erence in retrn o" the $anager5s port"olio de to stoc% selection<
'. 1.1()
*. ,.2()
C. (.-()
.. 6.1,)

70. 9hich stoc% $ar%et has the largest #eight in the :'>: inde4<
'. 0apan
*. Ger$an2
C. U1
.. 'stralia

19-17
Chapter 19 Globalization and International Investing 'ns#er 1e2

Multiple Choice Questions

1. In 2007, U.S. secrities represented !!!!!! o" the #orld $ar%et "or e&ities.
'. less than 2()
*. $ore than 2+,
C. bet#een ,0) and -0)
.. a consistent (0)

Difficulty: Medium

2. !!!!! has the largest n$ber o" listed corporations a$ong developed $ar%ets.
A. /he United States
*. 0apan
C. /he United 1ingdo$
.. S#itzerland

Difficulty: Easy

,. /otal capitalization o" corporate e&it2 in the U.S. at the beginning o" 2009 #as abot
!!!!!!! trillion.
A. 310
*. 320
C. 3,0
.. 3-0

Difficulty: Medium

19-1?
-. I" 2o li$it 2or invest$ent opportnit2 set to onl2 the largest si4 contries in the #orld in
ter$s o" e&it2 capitalization as a percentage o" total global e&it2 capital 2o #ill inclde
abot !!!!!!! o" the #orld5s e&it2.
'. ,()
*. -()
C. (()
D. 6()

Difficulty: Medium

(. 7i$iting 2or invest$ents to the top si4 contries in the #orld in ter$s o" $ar%et
capitalization $a2 $a%e sense "or a+an !!!!!!!!! investor bt probabl2 does not $a%e sense
"or a+an !!!!!!!! investor.
'. active8 passive
B. passive8 active
C. secrit2 selection e4pert8 $ar%et ti$er
.. "nda$ental8 technical

Difficulty: Medium

6. 9:*S are !!!!!!!!!!!!!!!!!!!!.
A. invest$ents in contr2 speci"ic port"olios
*. traded e4actl2 li%e $tal "nds
C. identical to '.;s
.. designed to give investors "oreign crrenc2 e4posre to $ltiple contries

Difficulty: Medium

7. 9hich one o" the "ollo#ing allo#s 2o to prchase stoc% o" a speci"ic "oreign co$pan2<
'. 9:*S
*. =SCI
C. '.;
.. :'>:

Difficulty: Medium

19-19
?. Generall2 spea%ing, contries #ith !!!!!! capitalization o" e&ities have !!!!!!!!.
A. larger8 higher G.@
*. s$aller8 #ealthier
C. larger8 s$aller G.@
.. larger8 higher gro#th contries

Difficulty: Easy

9. 2( contries #ith largest e&it2 capitalization $ade p abot !!!!! o" the #ord G.@ in
2007.
'. 22)
*. --)
C. 7()
D. ?()

Difficulty: Medium

10. 'ccording to a regression o" $ar%et cap on G.@ virtall2 all contries #ithot $aAor oil
revenes that restrict private sector gro#th and+or s""er "ro$ $aAor political stri"e #ind p
#ith !!!!!!! per capita G.@ than+as predicted b2 the regression.
'. higher
B. lo#er
C. e&al
.. so$eti$es lo#er and so$eti$es higher

Difficulty: Medium

11. '$ong the "actors e4plaining the retrn on a stoc%, !!!!!!! "actors are generall2 $ost
i$portant #hile !!!!!!! "actors are generall2 least i$portant.
'. do$estic8 indstrial
B. do$estic8 crrenc2
C. #orld8 indstrial
.. crrenc28 do$estic

Difficulty: Hard

19-20
12. :'>: stands "or !!!!!!!.
'. :&it2 'nd >oreign :4change
B. :ropean, 'stralian, >ar :ast
C. :ropean, 'sian, >oreign :4change
.. :ropean, '$erican, >ar :ast

Difficulty: Easy

1,. 9hich one o" the "ollo#ing contr2 ris%s re"ers to the possibilit2 o" e4propriation o"
assets, changes in ta4 polic2 and the possibilit2 o" restrictions on "oreign e4change
transactions<
'. .e"alt ris%
*. >oreign e4change ris%
C. =ar%et ris%
D. @olitical ris%

Difficulty: Medium

1-. /he !!!!!!!!!! inde4 is a #idel2 sed inde4 o" non-U.S. stoc%s.
'. C*B:
*. .o# 0ones
C. :'>:
.. 7eh$an Inde4

Difficulty: Easy

1(. Sppose that U.S. e&it2 $ar%ets represent abot ,() o" total global e&it2 $ar%ets and
that the t2pical U.S. investor has abot 9() o" their port"olio invested onl2 in U.S. e&ities.
/his is an e4a$ple o" !!!!!!!!!.
A. ho$e contr2 bias
*. e4cessive diversi"ication
C. active $anage$ent
.. passive $anage$ent

Difficulty: Easy

19-21
16. >or largest econo$ies in the #orld in 2007 #ere !!!!!!!!!!!!.
'. U.S., India, China, and 0apan
*. U.S., China, Canada, and 0apan
C. U.S., 0apan, Ger$an2, and China
.. China, U1, Canada, and U.S.

Difficulty: Medium

17. /he proper "or$la "or interest rate parit2 is given b2 !!!!!!!!!!!.
'. C1 D r
"
C"orEE+C1 D r
"
CUSEE F >
1
+:
0
*. C1 D r
"
CUSEE+C1 D r
"
C"orEE F :
0
+>
1
C. C1 D r
"
CUSEE+C1 D r
"
C"orEE F >
0
+:
0
.. C1 D r
"
C"orEE+C1 D r
"
C"orEE F >
0
+:
1

Difficulty: Medium

1?. ;esearch indicates that that e4change ris% o" the $aAor crrencies has been !!!!!!!!!
over ti$e.
A. relativel2 stable
*. increasing rapidl2
C. declining slightl2
.. declining rapidl2

Difficulty: Medium

19. It appears "ro$ e$pirical #or% that e4change rate ris% is !!!!!!!!!!!!.
'. declining "or individal invest$ents in recent 2ears
B. $ostl2 diversi"iable
C. $ostl2 s2ste$atic ris%
.. ni$portant "or an invest$ent in a single "oreign contr2

Difficulty: Medium

19-22
20. @assive investors #ith #ell-diversi"ied international port"olios !!!!!!!!!.
'. can sa"el2 ignore all political ris% in e$erging $ar%ets
*. can e4pect ver2 large diversi"ication gains "ro$ their international investing
C. do not need to be concerned #ith hedging e4posre to "oreign crrencies
.. can e4pect retrns to be better than the :'>: on a consistent basis

Difficulty: Medium

21. /he annal standard deviation o" an asset5s retrns is 1(). 9hat is the standard deviation
o" the average annal retrn on a "ive 2ear invest$ent in this asset, ass$ing there is no serial
correlation in the retrns<
'. 7(.00)
*. ,,.(-)
C. 1(.00)
D. 6.71)
1()+( F 6.70?)

Difficulty: Medium

22. /he correlation coe""icient bet#een the U.S. stoc% $ar%et inde4 and stoc% $ar%et indices
o" $aAor contries is !!!!!!!!!!.
'. bet#een -1 and -0.(0
*. bet#een -0.(0 and 0.00
C. bet#een 0.00 and 0.(0
D. bet#een 0.(0 and 1

Difficulty: Medium

19-2,
2,. In 2007, the !!! contries #ith the largest capitalization o" e&ities $ade p
appro4i$atel2 60) o" the #orld e&it2 port"olio.
'. 2
*. -
C. 6
.. 12

Difficulty: Medium

2-. Investor port"olios are notoriosl2 over #eighted in ho$e contr2 stoc%s. /his is
co$$onl2 called !!!!!!!!.
'. local "at
*. nativis$
C. ho$e contr2 bias
.. $isleading representation

Difficulty: Easy

2(. Corrption is aCnE !!!!!!!!! ris% variable.
'. "ir$ speci"ic
B. political
C. "inancial
.. econo$ic

Difficulty: Easy

26. ' U.S. hedge "nd o#ns S#iss "ranc bonds. /he "nd $anager believes that i" S#iss
interest rates rise relative to U.S. interest rates the vale o" the "ranc #ill rise. /o li$it the ris%
to the "nd5s dollar retrn, the "nd $anager shold !!!!!!!!!!.
'. sell the S#iss "ranc bonds no#
*. sell the S#iss "ranc "or#ard
C. probabl2 do nothing becase the "ranc $ove #ill o""set the lo#er bond price
.. enter into an interest rate s#ap to pa2 variable and receive "i4ed

Difficulty: Easy

19-2-
27. 'nnal in"lation rate is aCnE !!!!!!! ris% variable.
'. "ir$ speci"ic
*. political
C. "inancial
D. econo$ic

Difficulty: Easy

2?. ' U.S. insrance "ir$ $st pa2 G7(,000 in 6 $onths. /he spot e4change rate is 31.,2 per
ero and in 6 $onths the e4change rate is e4pected to be 31.,(. /he 6 $onth "or#ard rate is
crrentl2 31.,6 per ero. I" the insrer5s goal is to li$it its ris% shold the insrer hedge this
transaction< I" so ho#<
'. /he insrer need not hedge becase the e4pected e4change rate $ove #ill be "avorable.
B. /he insrer shold hedge b2 b2ing ero "or#ard even thogh this #ill cost $ore than the
C. /he insrer shold hedge b2 selling ero "or#ard becase this #ill cost less than the
.. /he insrer shold hedge b2 b2ing ero "or#ard even thogh this #ill cost less than the

Difficulty: Hard

29. ' "nd has assets deno$inated in eros and liabilities in 2en de in si4 $onths. /he si4
$onth "or#ard rate "or ero is 31.,6 per ero and the si4 $onth "or#ard rate "or the 2en is
121 2en per dollar. /he si4 $onth "or#ard rate "or the ero verss the 2en shold be
!!!!!!!! per ero.
'. H??.97
*. H1-(.,-
C. H1(-.67
D. H16-.(6
C31.,6+GECH121+3E F H16-.(6+G

Difficulty: Medium

19-2(
,0. Io invest in varios broadl2 diversi"ied international $tal "nds as #ell as 2or U.S.
port"olio. /he one ris% 2o probabl2 don5t have to #orr2 abot a""ecting 2or retrns is
!!!!!!!!!!.
'. bsiness c2cle ris%
*. beta ris%
C. in"lation ris%
D. crrenc2 ris%

Difficulty: Medium

,1. 'ccording to the International Contr2 ;is% Gide in 200?, #hich o" the "ollo#ing
contries #as the ris%iest according to the crrent co$posite ris% rating<
'. 0apan
*. United States
C. China
D. India

Difficulty: Medium

,2. Sppose the 6 $onth ris%-"ree rate o" retrn in the US' is (). /he crrent e4change rate
is 1 @ond F US 32.0(. /he 6 $onth "or#ard rate is 1 @ond F US 32.00. /he $ini$$ 2ield
on a 6 $onth ris%-"ree secrit2 in *ritain that #old indce a U.S. investor to invest in the
*ritish secrit2 is !!!!!!!!.
'. (.06)
*. 6.7-)
C. ?.-?)
D. 10.1,)

Difficulty: Hard

19-26
,,. /he &oted interest rate on a , $onth Canadian secrit2 is ?). /he crrent e4change rate
is C 31 F US 30.6?. /he , $onth "or#ard rate is C 31 F US 30.70. /he '@; Cdeno$inated in
US3E that a U.S. investor can earn b2 investing in the Canadian secrit2 is !!!!!!!!!!.
'. (.00)
*. 7.2()
C. 20.00)
.. 22.-,)

Difficulty: Hard

,-. Sppose the 1-2ear ris%-"ree rate o" retrn in the US' is () and the 1-2ear ris%-"ree rate
o" retrn in *ritain is ?). /he crrent e4change rate is 31 F J0.(0. '
1-2ear "tre e4change rate o" !!!!!!!!!! #old $a%e a U.S. investor indi""erent bet#een
investing in the U.S. secrit2 and investing in the *ritish secrit2.
'. J0.(1(0
B. J0.(1-2
C. J0.(12,
.. J0.-?(9

Difficulty: Medium

19-27
,(. /he ris%-"ree interest rate in the US is -) #hile the ris%-"ree interest rate in the U1 is 9).
I" the *ritish pond is #orth 32.00 in the spot $ar%et, a 1-2ear "tres rate on the *ritish
pond shold be #orth !!!!!!!!!!.
'. 31.?,
B. 31.91
C. 32.0?
.. 32.1?

Difficulty: Medium

,6. /he ris%-"ree interest rate in the US is ?) #hile the ris%-"ree interest rate in the U1 is
1(). I" the 1-2ear "tres price on the *ritish pond is 32.-0, the spot $ar%et vale o" the
*ritish pond toda2 shold be !!!!!!!!!!.
'. 31.9,
*. 32.22
C. 32.(6
.. 32.76

Difficulty: Medium

19-2?
,7. /he present e4change rate is C 31 F US 30.77. /he 1-2ear "tre rate is C 31 F US 30.7,.
/he 2ield on a 1-2ear U.S. bill is -). ' 2ield o" !!!!!!!!!! on a 1-2ear Canadian bill #ill
$a%e investors indi""erent bet#een investing in the U.S. bill and the Canadian bill.
A. 9.7)
*. 2.9)
C. 2.?)
.. 2.0)

Difficulty: Medium

,?. /he 2ield on a 1-2ear bill in the U.1. is 6) and the present e4change rate is 1 @ond F US
32.00. I" 2o e4pect the e4change rate to be 1 @ond F US 31.9( a 2ear "ro$ no#, the retrn a
U.S. investor can e4pect to earn b2 investing in U.1. bills is appro4i$atel2 !!!!!!!!!!.
'. -,)
*. ,)
C. ,.,()
.. ?.72)

Difficulty: Medium

19-29
,9. 'ss$e there is a "i4ed e4change rate bet#een the Canadian and U.S. dollar. /he
e4pected retrn and standard deviation o" retrn on the U.S. stoc% $ar%et are 1,) and 1()
Canadian stoc% $ar%ets is 1.2). I" 2o invested (0) o" 2or $one2 in the Canadian stoc%
$ar%et and (0) in the U.S. stoc% $ar%et, the e4pected retrn on 2or port"olio #old be
!!!!!!!!!!.
'. 12.0)
B. 12.()
C. 1-.0)
.. 1(.()

Difficulty: Medium

-0. 'ss$e there is a "i4ed e4change rate bet#een the Canadian and U.S. dollar. /he
e4pected retrn and standard deviation o" retrn on the U.S. stoc% $ar%et are 10) and 1()
Canadian stoc% $ar%ets is .012. I" 2o invested (0) o" 2or $one2 in the Canadian stoc%
$ar%et and (0) in the U.S. stoc% $ar%et, the standard deviation o" retrn on 2or port"olio
#old be !!!!!!!!!!.
'. 10.96)
*. 12.2()
C. 1,.-2)
.. 1(.(0)

Difficulty: Medium

19-,0
-1. Inclsion o" international e&ities in a U.S. investor5s port"olio has historicall2 prodced
!!!!!!!!!!!!!!!!!!!.
A. a sbstantiall2 redced port"olio variance
*. a slightl2 redced port"olio variance
C. a sbstantiall2 poorer port"olio variance
.. a slightl2 poorer port"olio variance

Difficulty: Medium

-2. 9:*S are !!!!!!!!!!!!!.
'. $tal "nds $ar%eted internationall2 on the Internet
*. s2nthetic do$estic stoc% indices
C. e&it2 indices that replicate the price and 2ield per"or$ance o" "oreign stoc% port"olios
.. single stoc% invest$ents in a "oreign secrit2

Difficulty: Easy

-,. Io are a U.S. investor #ho prchased *ritish secrities "or ,,(00 ponds one 2ear ago
#hen the *ritish pond cost 31.,(. Ko dividends #ere paid on the *ritish secrities in the
past 2ear. Ior total retrn based in U.S. dollars #as !!!!!!!!!! i" the vale o" the secrities
is no# -,200 ponds and the pond is #orth 31.1(.
'. -,.?)
B. 2.2)
C. (.6)
.. 1()

Difficulty: Medium

19-,1
--. ;eal U.S. interest rates $ove above 0apanese interest rates. I" 2o believe that 0apanese
interest rates #on5t $ove and 2o believe that interest rate parit2 #ill hold then
!!!!!!!!!!!!.
'. the 2en per dollar e4change rate shold rise
B. the dollar per 2en e4change rate shold rise
C. the e4change rate shold sta2 the sa$e i" parit2 holds
.. one can5t predict the e4change rate change "ro$ the in"or$ation given

Difficulty: Hard

Sppose a U.S. investor #ishes to invest in a *ritish "ir$ crrentl2 selling "or J(0 per share.
/he investor has 37,000 to invest and the crrent e4change rate is 31.-0+J.

-(. Lo# $an2 shares can the investor prchase<
'. 1-0
B. 100
C. 71.-,
.. none o" the above
37,000 F 7,000+1.-0 F J(,000
J(,000+(0 F 100 shares

Difficulty: Medium

dollar-deno$inated retrn<
'. 1-)
B. 10)
C. 9.,)
.. 7.1)
J(( 100 1.-0 F 37,700
C7700+7000E - 1 F 1.10 -1 F 10)

Difficulty: Medium

19-,2
pond-deno$inated retrn<
'. 1-)
B. 10)
C. 9.,)
.. 7.1)
J(( 100 F J(,(00
J(0 100 F J(,000
C((00+(000E - 1 F 1.10 -1 F 10)

Difficulty: Medium

-?. '"ter one 2ear, the e4change rate is 31.60+J and the share price is J((. 9hat is the dollar-
deno$inated retrn<
A. 2(.7)
*. 16)
C. 1-.,)
.. 9.,)
J(( 100 1.60 F 3?,?00
C??00+7000E - 1 F 1.2(7 -1 F 2(.7)

Difficulty: Medium

19-,,
-9. '"ter one 2ear, the e4change rate is 31.(0+J and the share price is J-(. Lo# $ch o" 2or
dollar-deno$inated retrn is de to the crrenc2 change<
'. 10.00)
B. 6.-,)
C. -.,-)
.. 2.12)
Gain "ro$ crrenc2 is -,.(71) - C-10)E F 6.-29)

Difficulty: Hard

(0. Io "ind that the e4change rate &ote "or the 2en is 121 2en per dollar. /his is an e4a$ple
o" a+an !!!!!!!! &ote. Io also "ind that the ero is #orth 31.,,. /his second &ote is an
e4a$ple o" a+an !!!!!!! &ote.
'. direct8 indirect
B. indirect8 direct
C. "oreign8 U.S.
.. U.S.8 "oreign

Difficulty: Medium

(1. '$ong e$erging contries the largest e&it2 $ar%et in 2007 #as located in
!!!!!!!!!!!!!.
'. China
B. India
C. *razil
.. ;ssia

Difficulty: Medium

19-,-
(2. In the @;S contr2 co$posite ris% ratings a score o" !!!!!! represents the least ris%2 and
a score o" !!!!! represents the $ost ris%2.
'. 08 100
*. 08 (0
C. (08 0
D. 1008 0

Difficulty: Easy

(,. 9hich e$erging contr2 has the highest percentage gro#th in $ar%et capitalization<
'. *razil
B. China
C. /ai#an
.. /r%e2

Difficulty: Easy

(-. /he dollar per ero spot rate is 1.2 #hen an i$porter o" >rench #ines places an order. 6
$onths later, #hen she ta%es deliver2, the spot rate is 1., dollars per ero. I" her original
invoice #as "or ,0,000 ero, #hat is her gain or loss de to e4change rate ris%<
'. 3,,000 gain
B. 3,,000 loss
C. 36,000 loss
.. no gain or loss
Briginal cost F G,0000 1.2 F 3,6,000
Ke# cost F G,0000 1., F 3,9,0008 3,6000 - 3,9000 F -3,000.

Difficulty: Medium

19-,(
((. 'n i$porter o" televisions "ro$ 0apan has a contract to prchase a ship$ent o" televisions
"or 2,000,000 2en. /he spot rate increases "ro$ 10( 2en per dollar to 10? 2en per dollar. 9hat
is the i$porter5s gain or loss<
A. 3(29 gain
*. 3(29 loss
C. 3619 gain
.. 3619 loss
Briginal cost F 2,000,000+10( F 319,0-?
Ke# cost F 2,000,000+10? F 31?,(19
Change F 190-? - 1?(19 F (29

Difficulty: Medium

(6. ' contr2 has a @;S political ris% rating o" 7(, a "inancial score o" -0 and an econo$ic
score o" ,(. /he contr25s co$posite rating is !!!!!!!!!.
A. 7(
*. (0
C. -0
.. ,(
@;S F C7( D -0 D ,(E+2 F 7(

Difficulty: Medium

(7. /he ris% "ree rate in the US is 2.() and the ris% "ree rate in :rope is ,.2). I" the spot
rate o" dollars per ero is 1.,2, #hat is the li%el2 "or#ard rate in ter$s o" dollars per ero<
'. 1.,0
B. 1.,1
C. 1.,2
.. 1.,,
"or#ard rate F C1.,2EC1.02(+1.0,2E F 1.,1

Difficulty: Medium

19-,6
(?. /he ris% "ree rate in the US is -.0) and the ris% "ree rate in 0apan is 1.2). I" the spot rate
o" 2en to dollars is 10(, #hat is the li%el2 2en per dollar "or#ard rate<
'. 101
B. 102
C. 10(
.. 10?
"or#ard rate F C10(EC1.012+1.0-0E F 102.2

Difficulty: Medium

(9. /he 2en per dollar spot rate is 10-. /he 2en per dollar "or#ard rate is 107. I" the US ris%
"ree rate is 2.-), #hat is the li%el2 2en ris% "ree rate<
'. 1.2-)
*. 2.,()
C. ,.9?)
D. (.,()
Ien rate F C1.02-EC107+10-E - 1 F .0(,(

Difficulty: Medium

60. In the @;S "inancial ris% ratings the U.S. rates poorl2 becase o" the U.S. e4periences
!!!!!!!!.
I. large bdget de"icit
II. large trade de"icit
III. large a$ont o" total debt
'. I onl2
*. I and II onl2
C. I and III onl2
D. I, II and III

Difficulty: Easy

19-,7
61. /he $aAor participants #ho directl2 prchase secrities in the capital $ar%ets o" other
contries are predo$inantl2 !!!!!!!!!!!!.
A. large instittional investors
*. individal investors
C. govern$ent agencies
.. central ban%s

Difficulty: Easy

62. B" the "ollo#ing, #hich is the $ost co$$onl2 sed international inde4<
'. .0I'
B. :'>:
C. ;ssell 2000
.. SM@(00

Difficulty: Medium

6,. 9:*S di""er "ro$ $tal "nds in that !!!!!!!!!!.
I. Shares o" 9:*S can be shorted
II. 9:*S shares trade continosl2 on the '=:N
III. 9:*S are passivel2 $anaged
'. II onl2
*. II and III onl2
C. I and III onl2
D. I, II and III

Difficulty: Medium

6-. /he variation in betas o" e$erging $ar%ets sggests that !!!!!!!!!!!!.
'. e$erging $ar%ets are $ore ni"or$ than developed $ar%ets
*. beta does not hold in international $ar%ets
C. international diversi"ication $a2 redce port"olio ris%
.. ris%ier e$erging $ar%ets have ni"or$l2 lo#er betas

Difficulty: Medium

19-,?
6(. Bne 2ear U.S. interest rates are () and :ropean interest rates are 7). /he spot ero
direct e4change rate &ote is 1.,2 and the one 2ear "or#ard rate direct &ote is 1.,(. I" 2o
'. 39-,,22
*. 3((,,-(
C. 3--,,1?
.. 3,,,(9(
/his is called covered interest arbitrage, the steps are otlined belo#O
1. *orro# 31 $illion, in one 2ear o#eO 31 $illion P1.0( F 31,0(0,000
2. Sell dollars and b2 ero spotO 31,000,000+31.,2 F G7(7,(7(.76
,. Invest in ero secrities and earn 7.00)O G7(7,(7(.76 P 1.07 F G?10,606.06
-. Cover 31,0(0,000 o#ed in one 2ear b2 selling ero "or#ardO
G?10,606.06 P 31.,( F 31,09-,,1?.1?
;epa2 31,0(0,000 and net 31,09-,,1?.1? - 31,0(0,000 F 3--,,1?.1?

Difficulty: Hard

66. Bne 2ear U.S. interest rates are 7) and :ropean interest rates are (). /he spot ero
direct e4change rate &ote is 1.,0 and the one 2ear "or#ard rate direct &ote is 1.2(. I" 2o
'. 360,,?-
*. 3-2,97,
C. 36?,-22
D. 37?,(00
/his is called covered interest arbitrage, the steps are otlined belo#O
1. *orro# G1 $illion, in one 2ear o#eO G1 $illion P1.0( F G1,0(0,000
2. Sell ero and b2 3 spotO G1,000,000 P 31.,0 F 31,,00,000
,. Invest in the U.S. and earn 7)O 31,,00,000 P 1.07 F 31,,91,000
-. Cover G1,0(0,000 o#ed in one 2ear b2 b2ing ero "or#ard, #ill re&ireO
G1,0(0,000 P 31.2( F 31,,12,(00
7eaves 31,,91,000 - 31,,12,(00 F 37?,(00 pro"it in dollars

Difficulty: Hard

19-,9

'll e4change rates are e4pressed as nits o" "oreign crrenc2 that can be prchased #ith one
U.S. dollar. 'ns#er the "ollo#ing &estions abot deco$posing the $anager5s per"or$ance.

67. 9hat is the di""erence in retrn o" the $anager5s port"olio de to crrenc2 selection<
'. -()
*. -,)
C. 2)
.. 1)
Crrenc2 Selection
:'>:O :'>: #eightP QC:
1
+:
0
E - 1R F C0.,EC0.? - 1E D C0.1EC1.1 - 1E D C0.6EC1 - 1E F -()
=anagerO =anager #eight P QC:
1
+:
0
E - 1R F C0.2(EC0.? - 1E D C0.2EC1.1 - 1E D C0.((EC1 - 1E F
-,)
Gain F -,) - C-()E F D2)

Difficulty: Hard

6?. 9hat is the di""erence in retrn o" the $anager5s port"olio de to contr2 selection<
'. -0.60)
B. -0.7()
C. 0.12)
.. 0.22)
Contr2 Selection
:'>:O C:'>: #eightECretrn e&it2 inde4E F C0.,EC20)E D C0.1EC1()E D C0.6EC2()E F 22.()
=anagerO C=anager #eightECretrn e&it2 inde4E F C0.2(EC20)E D C0.2EC1()E D C0.((EC2()E
F 21.7()
Gain F 21.7() - 22.() F -0.7()

Difficulty: Hard

19--0
69. 9hat is the di""erence in retrn o" the $anager5s port"olio de to stoc% selection<
'. 1.1()
B. ,.2()
C. (.-()
.. 6.1,)
Stoc% Selection
C=anager5s 9eightsEC=anager ;etrn - :&it2 Inde4 ;etrnE
Selection F C0.2(EC1?) - 20)E D C0.2EC20) - 1()E D C0.((EC,0) - 2()E F ,.2()

Difficulty: Hard

70. 9hich stoc% $ar%et has the largest #eight in the :'>: inde4<
A. 0apan
*. Ger$an2
C. U1
.. 'stralia

Difficulty: Medium

19--1

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Chapter 19 - Globalization and International Investing

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