Chapter 25 Test Bank - Static

Student: ___________________________________________________________________________

Multiple Choice Questions

1. Shares of several foreign firms are traded in the U.S. markets in the form of

A. ADRs.
B. ECUs.
C. single-country funds.
D. All of the options are correct.
E. None of the options are correct.

2. __________ 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. None of the options are correct.

3. __________ are mutual funds that invest in one country only.

A. ADRs
B. ECUs
C. Single-country funds
D. All of the options are correct.
E. None of the options are correct.

4. The performance of an internationally-diversified portfolio may be affected by

A. country selection.
B. currency selection.
C. stock selection.
D. All of the options are correct.
E. None of the options are correct.

5. Over the period 2011-2016, most correlations between the U.S. stock index and stock-index portfolios of other countries were

A. negative.
B. positive but less than .9.
C. approximately zero.
D. .9 or above.
E. None of the options are correct.

6. The __________ index is a widely used index of non-U.S. stocks.

A. CBOE
B. Dow Jones
C. EAFE
D. All of the options are correct.
E. None of the options are correct.

7. According to PRS, in 2015, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky)?

A. Switzerland
B. Canada
C. Germany
D. U.S.

8. Which country has the highest in GDP per capita?

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A. Luxembourg
B. Canada
C. Germany
D. U.S.

9. Which country has the largest stock market compared to GDP?

A. Japan
B. Germany
C. Hong Kong
D. U.S.

10. Using local currency returns, the S&P 500 has the highest correlation with

A. Euronext.
B. FTSE.
C. Nikkei.
D. Toronto.

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

A. 19%
B. 60%
C. 43%
D. 41%

12. The straightforward generalization of the simple CAPM to international stocks is problematic because

A. inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ.
B. investors in different countries view exchange-rate risk from the perspective of different domestic currencies.
C. taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio.
D. All of the options are correct.
E. None of the options are correct.

13. 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 options are correct.

14. Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year
forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S.
investor to invest in the British security?

A. 2.44%
B. 2.50%
C. 7.00%
D. 7.62%
E. None of the options are correct.

15. The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is
C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is

A. 3.59%.
B. 4.00%.
C. 5.23%.
D. 8.46%.
E. None of the options are correct.

16. Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current
exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor

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indifferent between investing in the U.S. security and investing in the British security.

A. 1.6037
B. 2.0411
C. 1.7500
D. 2.3369

17. 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.

A. 2.4%
B. 1.3%
C. 6.4%
D. 6.7%
E. None of the options are correct.

18. 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

A. 12.0%.
B. 12.5%.
C. 13.0%.
D. 15.5%.

19. 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 standard deviation of return
of your portfolio would be

A. 12.53%.
B. 15.21%.
C. 17.50%.
D. 18.75%.

20. 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. cross-correlations are not considered in the weighting.
C. inflation is not represented in the weighting.
D. the weights are not proportional to the asset bases of the respective countries.
E. None of the options are correct.

21. You are a U.S. investor who purchased British securities for 2,000 pounds, one year ago when the British pound cost $1.50. No
dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of
the securities is now 2,400 pounds and the pound is worth $1.60.

A. 16.7%
B. 20.0%
C. 28.0%
D. 40.0%
E. None of the options are correct.

22. U.S. investors

A. can trade derivative securities based on prices in foreign security markets.

B. cannot trade foreign derivative securities.
Ccan trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on
. FTSE (Financial Times Share Exchange) indexes of U.K. and European stocks.
Dcan trade derivative securities based on prices in foreign security markets and can trade options and futures on

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. the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes
of U.K. and European stocks.
E. None of the options are correct.

23. Exchange-rate risk

A. results from changes in the exchange rates between the currency 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 results from changes in the exchange rates between the currency of the investor and the country in which the investment is made
and cannot be eliminated.
E. results from changes in the exchange rates between the currency of the investor and the country in which the investment is made
and can be hedged by using a forward or futures contract in foreign exchange.

24. International investing

A. cannot be measured against a passive benchmark, such as the S&P 500.

B. can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East).
C. can be measured against international indexes.
D can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East),
. and against international indexes. E. None of the options are correct.

25. 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 currency selection return contribution.

A. +20%
B. 5%
C. +15%
D. +5%
E. 10%

26. 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.

A. 12.5%
B. 12.5%
C. 11.25%
D. 1.25%
E. 1.25%

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

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Calculate Quantitative's stock selection return contribution.

A. 1.0%
B. 1.0%
C. 3.0%
D. 0.25%

28. Using the S&P 500 portfolio as a proxy of the market portfolio

A. is appropriate because U.S. securities represent more than 60% of world equities.
B. is appropriate because most U.S. investors are primarily interested in U.S. securities.
C. is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S. securities.
D. is inappropriate because U.S. securities make up less than 41% of world equities.
E. is inappropriate because the average U.S. investor has less than 20% of his or her portfolio in non-U.S. equities.

29. When an investor adds international stocks to his or her U.S. stock portfolio,

A. it will raise his or her risk relative to the risk he or she would face just holding U.S. stocks.
B. he or she can reduce the risk of his or her portfolio.
C. he or she will increase his or her expected return but must also take on more risk.
D. it will have no impact on either the risk or the return of his or her portfolio.
[Link] or she needs to seek professional management because he or she doesn't have access to international investments on his or her
own.

30. "ADRs" stands for ___________, and "WEBS" stands for ____________.

A. additional dollar returns; weekly equity and bond survey

B. additional daily returns; world equity and bond survey
C. American dollar returns; world equity and bond statistics
D. American depository receipts; world equity benchmark shares
E. adjusted dollar returns; weighted equity benchmark shares

31. WEBS portfolios

A. are passively managed.

B. are shares that can be sold by investors.
C. are free from brokerage commissions.
D. are passively managed and are shares that can be sold by investors.
E. All of the options are correct.

32. The EAFE is

A. the East Asia Foreign Equity index.

B. the Economic Advisor's Foreign Estimator index.
C. the European and Asian Foreign Equity index.
D. the European, Asian, French Equity index.
E. the European, Australian, Far East index.

33. Home bias refers to

A. the tendency to vacation in your home country instead of traveling abroad.

B. the tendency to believe that your home country is better than other countries.
C. the tendency to give preferential treatment to people from your home country.
D. the tendency to overweight investments in your home country.

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E. None of the options are correct.

34. 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

A. foreign exchange risk.

B. political risk.
C. translation exposure.
D. hedging risk.

35. As exchange rates change, they

A. change the relative purchasing power between countries.

B. can affect imports and exports between countries.
C. will affect the flow of funds between countries.
D. All of the options are true.

36. When Country A's currency strengthens against Country B's, citizens of Country A will

A. pay less to buy Country B's products.

B. pay more to buy Country B's products.
C. pay more to buy domestically-produced products.
D. not be affected by the change in their currency's value.

37. 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

A. Purchasing Power Parity Theory.

B. Balance of Payments.
C. Interest Rate Parity Theory.
D. None of the options are correct.

38. 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?

A. Shanghai
B. India
C. Nikkei
D. U.S.

39. 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?

A. Korea
B. U.S.
C. Toronto
D. Nikkei

40. 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

A. foreign exchange risk.

B. political risk.
C. translation exposure.
D. hedging risk.

41. The yield on a 1-year bill in the U.K. is 7%, and the present exchange rate is 1 pound = U.S. $1.65. If you expect the exchange
rate to be 1 pound = U.S. $1.45 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. 3.2%.
C. 8%.
D. 5.97%.
E. None of the options

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42. Suppose the 1-year risk-free rate of return in the U.S. is 6%. The current exchange rate is 1 pound = U.S. $1.62. The 1-year
forward rate is 1 pound = $1.53. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S.
investor to invest in the British security?

A. 15.44%
B. 13.50%
C. 12.24%
D. 7.62%
E. None of the options

43. 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

A. 3.59%.
B. 4.00%.
C. 5.07%.
D. 8.46%.
E. None of the options

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

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

45. You are a U.S. investor who purchased British securities for 2,200 pounds one year ago when the British pound cost $1.50. No
dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of
the securities is now 2,560 pounds and the pound is worth $1.60.

A. 16.7%
B. 20.3%
C. 24.1%
D. 41.4%
E. None of the options

46. The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.75. The yield on a 1-year U.S. bill is 5%. A
yield of __________ on a 1-year Canadian bill will make investor indifferent between investing in the U.S. bill and the Canadian
bill.

A. 9.2%
B. 8.3%
C. 6.4%
D. 11.3%
E. None of the options

47. You are a U.S. investor who purchased British securities for 4,000 pounds one year ago when the British pound cost $1.50. No
dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of
the securities is now 4,400 pounds and the pound is worth $1.62.

A. 16.7%
B. 18.8%
C. 28.0%
D. 40.0%
E. None of the options

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

A. 1.6385
B. 2.0411

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C. 1.7500
D. 2.3369

Chapter 25 Test Bank - Static Key

Multiple Choice Questions

1. Shares of several foreign firms are traded in the U.S. markets in the form of

A. ADRs.
B. ECUs.
C. single-country funds.
D. All of the options are correct.
E. None of the options are correct.

American Depository Receipts (ADRs) allow U.S. investors to invest in foreign stocks via transactions on the U.S. stock exchanges.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global securities

2. __________ 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. None of the options are correct.

All of the factors are political in nature and thus are examples of political risk.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global risks

3. __________ are mutual funds that invest in one country only.

A. ADRs
B. ECUs
C. Single-country funds
D. All of the options are correct.
E. None of the options are correct.

Mutual funds that invest in the stocks of one country only are called single-country funds.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: International investing - risks, returns, and benefits

4. The performance of an internationally-diversified portfolio may be affected by

A. country selection.
B. currency selection.
C. stock selection.
D. All of the options are correct.
E. None of the options are correct.

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All of the factors may affect the performance of an international portfolio.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

5. Over the period 2011-2016, most correlations between the U.S. stock index and stock-index portfolios of other countries were

A. negative.
B. positive but less than .9.
C. approximately zero.
D. .9 or above.
E. None of the options are correct.

Correlation coefficients were typically below .9.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Diversification measures

6. The __________ index is a widely used index of non-U.S. stocks.

A. CBOE
B. Dow Jones
C. EAFE
D. All of the options are correct.
E. None of the options are correct.

The Europe, Australia, Far East (EAFE) index computed by Morgan Stanley is a widely used index of non-U.S. stocks.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global markets

7. According to PRS, in 2015, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky)?

A. Switzerland
B. Canada
C. Germany
D. U.S.

See Figure 25.9.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global markets

8. Which country has the highest in GDP per capita?

A. Luxembourg
B. Canada
C. Germany
D. U.S.

See Table 25.1.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global markets

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9. Which country has the largest stock market compared to GDP?

A. Japan
B. Germany
C. Hong Kong
D. U.S.

See Table 25.1.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global markets

10. Using local currency returns, the S&P 500 has the highest correlation with

A. Euronext.
B. FTSE.
C. Nikkei.
D. Toronto.

See Table 25.6

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global markets

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

A. 19%
B. 60%
C. 43%
D. 41%

See Table 25.1.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global markets

12. The straightforward generalization of the simple CAPM to international stocks is problematic because

A. inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ.
B. investors in different countries view exchange-rate risk from the perspective of different domestic currencies.
C. taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio.
D. All of the options are correct. E. None of the options are correct.
All of the factors make a broad generalization of the CAPM to international stocks problematic.

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global considerations and issues

13. 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%.

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E. None of the options are correct.

r(US) = [1 + r(UK)]F0/E0 1; [1.08][1.50/1.60] 1 = 1.25%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Exchange quotes, rates, and risks

14. Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year
forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S.
investor to invest in the British security?

A. 2.44%
B. 2.50%
C. 7.00%
D. 7.62%
E. None of the options are correct.

1.05 = (1 + r) × [1.57/1.60] 1; r = 7.0%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Exchange quotes, rates, and risks

15. The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is
C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is

A. 3.59%.
B. 4.00%.
C. 5.23%.
D. 8.46%.
E. None of the options are correct.

1.08[0.76/0.78] = x 1; x = 5.23%.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Exchange quotes, rates, and risks

16. Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current
exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor
indifferent between investing in the U.S. security and investing in the British security.

A. 1.6037
B. 2.0411
C. 1.7500
D. 2.3369

1.04/1.07 = x/1.65; x = 1.6037.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

17. 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.

A. 2.4%
B. 1.3%
C. 6.4%

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D. 6.7%
E. None of the options are correct.

1.04 = [($0.76/$0.78)(1 + r)] 1; r = 6.7%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

18. 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

A. 12.0%.
B. 12.5%.
C. 13.0%.
D. 15.5%.

18% (0.5) + 13%(0.5) = 15.5%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: International investing - risks, returns, and benefits
19. 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 standard deviation of return
of your portfolio would be

A. 12.53%.
B. 15.21%.
C. 17.50%.
D. 18.75%.
2 2 2 2 1/2
sP = [(0.5) (15%) + (0.5) (20%) + 2(0.5)(0.5)(1.5)] = 15.21%.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: International investing - risks, returns, and benefits

20. 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. cross-correlations are not considered in the weighting.
C. inflation is not represented in the weighting.
D. the weights are not proportional to the asset bases of the respective countries.
E. None of the options are correct.

Some argue that countries should be weighted in proportion to their GDP to properly adjust for the true size of their corporate
sectors, since many firms are not publicly traded.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global markets

21. You are a U.S. investor who purchased British securities for 2,000 pounds, one year ago when the British pound cost $1.50. No
dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of
the securities is now 2,400 pounds and the pound is worth $1.60.

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A. 16.7%
B. 20.0%
C. 28.0%
D. 40.0%
E. None of the options are correct.

($3,840 $3,000)/$3,000 = 0.28, or 28.0%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: International investing - risks, returns, and benefits

22. U.S. investors

A. can trade derivative securities based on prices in foreign security markets.

B. cannot trade foreign derivative securities.
C can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE
(Financial Times Share Exchange) indexes of U.K. and European stocks.
D. can trade derivative securities based on prices in foreign security markets and can trade options and futures on the Nikkei stock
index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K. and
European stocks.
E. None of the options are correct.

U.S. investors can trade derivative securities based on prices in foreign security markets and can trade options and futures on the
Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of
U.K. and European stocks.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global markets

23. Exchange-rate risk

A. results from changes in the exchange rates between the currency 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. results from changes in the exchange rates between the currency of the investor and the country in which the investment is made
and cannot be eliminated.
E results from changes in the exchange rates between the currency of the investor and the country in which the investment is made
and can be hedged by using a forward or futures contract in foreign exchange.

Although international investing involves risk resulting from the changing exchange rates between currencies, this risk can be
hedged by using a forward or futures contract in foreign exchange.

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Exchange quotes, rates, and risks

24. International investing

A. cannot be measured against a passive benchmark, such as the S&P 500.

B. can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East).
C. can be measured against international indexes.
D. can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East), and against
international indexes.
E. None of the options are correct.

International investments can be evaluated against an international index, such as EAFE, created by Morgan Stanley, and others that
have become available in recent years.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

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 Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global markets

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25. 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 currency selection return contribution.

A. +20%
B. 5%
C. +15%
D. +5%
E. 10%

EAFE: (.30)(10%) + (.10)( 10%) + (.60)(30%) = 20% appreciation; Diversified: (.25)(10%) + (.25)( 10%)
+ (.50) (30%) = 15% appreciation; Loss of 5% relative to EAFE.
AACSB: Knowledge Application
Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Global analysis

26. 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.

A. 12.5%
B. 12.5%
C. 11.25%
D. 1.25%
E. 1.25%

EAFE: (.30)(10%) + (.10)(5%) + (.60)(15%) = 12.5%; Diversified: (.25)(10%) + (.25)(5%) + (.50) (15%
= 11.25%; Loss of 1.25% relative to EAFE.

AACSB: Knowledge Application

Blooms: Apply
Difficulty: 3 Challenge
Gradable: automatic
Topic: Global analysis

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

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McGraw-Hill Education.
Calculate Quantitative's stock selection return contribution.

A. 1.0%
B. 1.0%
C. 3.0%
D. 0.25%

(9% − 10%).25 + (8% − 5%).25 + (16% − 15%).50 = 1.00%.

AACSB: Knowledge Application
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global analysis

28. Using the S&P 500 portfolio as a proxy of the market portfolio

A. is appropriate because U.S. securities represent more than 60% of world equities.
B. is appropriate because most U.S. investors are primarily interested in U.S. securities.
C. is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S. securities.
D. is inappropriate because U.S. securities make up less than 41% of world equities.
E. is inappropriate because the average U.S. investor has less than 20% of his or her portfolio in non-U.S.
equities.

It is important to take a global perspective when making investment decisions. The S&P 500 is
increasingly inappropriate.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

29. When an investor adds international stocks to his or her U.S. stock portfolio,

A. it will raise his or her risk relative to the risk he or she would face just holding U.S. stocks.
B. he or she can reduce the risk of his or her portfolio.
C. he or she will increase his or her expected return but must also take on more risk.
D. it will have no impact on either the risk or the return of his or her portfolio.
E. he or she needs to seek professional management because he or she doesn't have access to international
investments on his or her own.

See Figure 25.1.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: International investing - risks, returns, and benefits

30. "ADRs" stands for ___________, and "WEBS" stands for ____________.

A. additional dollar returns; weekly equity and bond survey

B. additional daily returns; world equity and bond survey
C. American dollar returns; world equity and bond statistics
D. American depository receipts; world equity benchmark shares
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E. adjusted dollar returns; weighted equity benchmark shares

The student should be familiar with these basic terms that relate to international investing.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global securities

31. WEBS portfolios

A. are passively managed.

B. are shares that can be sold by investors.
C. are free from brokerage commissions.
D. are passively managed and are shares that can be sold by investors. E. All of the options are correct.

They are passively managed and when holders want to divest their shares, they sell them rather than
redeem them with the company that issued them. There are brokerage commissions, however.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global securities

32. The EAFE is

A. the East Asia Foreign Equity index.

B. the Economic Advisor's Foreign Estimator index.
C. the European and Asian Foreign Equity index.
D. the European, Asian, French Equity index.
E. the European, Australian, Far East index.

The index is one of several world equity indices that exist. It is computed by Morgan Stanley.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global markets

33. Home bias refers to

A. the tendency to vacation in your home country instead of traveling abroad.

B. the tendency to believe that your home country is better than other countries.
C. the tendency to give preferential treatment to people from your home country.
D. the tendency to overweight investments in your home country.
E. None of the options are correct.

Home bias refers to the tendency to overweight investments in your home country.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

34. 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

A. foreign exchange risk.

B. political risk.
C. translation exposure.
D. hedging risk.

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Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a
currency other than that of the base currency of the company.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

35. As exchange rates change, they

A. change the relative purchasing power between countries.

B. can affect imports and exports between countries.
C. will affect the flow of funds between countries.
D. All of the options are true.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

36. When Country A's currency strengthens against Country B's, citizens of Country A will

A. pay less to buy Country B's products.

B. pay more to buy Country B's products.
C. pay more to buy domestically-produced products.
D. not be affected by the change in their currency's value.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

37. 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

A. Purchasing Power Parity Theory.

B. Balance of Payments.
C. Interest Rate Parity Theory.
D. None of the options are correct.
Home bias refers to the tendency to overweight investments in your home country.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

38. 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?

A. Shanghai
B. India
C. Nikkei
D. U.S.

See Table 25.4

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global markets

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

A. Korea
B. U.S.
C. Toronto
D. Nikkei

See Table 25.4

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global markets

40. 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

A. foreign exchange risk.

B. political risk.
C. translation exposure.
D. hedging risk.

Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a
currency other than that of the base currency of the company.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Gradable: automatic
Topic: Global analysis

41. The yield on a 1-year bill in the U.K. is 7%, and the present exchange rate is 1 pound = U.S. $1.65. If
you expect the exchange rate to be 1 pound = U.S. $1.45 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. 3.2%.
C. 8%.
D. 5.97%.
E. None of the options

r(US) = [1 + r(UK)]F 0/E0 1; [1.07][1.45/1.65] 1 = 5.97%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Exchange quotes, rates, and risks

42. Suppose the 1-year risk-free rate of return in the U.S. is 6%. The current exchange rate is 1 pound =
U.S. $1.62. The 1-year forward rate is 1 pound = $1.53. What is the minimum yield on a 1-year risk-free
security in Britain that would induce a U.S. investor to invest in the British security?

A. 15.44%
B. 13.50%
C. 12.24%
D. 7.62%
E. None of the options

1.06 = (1 + r) × [1.53/1.62] 1; r = 12.24%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
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 Gradable: automatic
Topic: Exchange quotes, rates, and risks

43. 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

A. 3.59%.
B. 4.00%.
C. 5.07%.
D. 8.46%.
E. None of the options

1.078[0.77/0.79] = x 1; x = 5.07%.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

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

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

1.045/1.077 = x/1.60; x = 1.5525.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

45. You are a U.S. investor who purchased British securities for 2,200 pounds one year ago when the
British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total
return based on U.S. dollars was __________ if the value of the securities is now 2,560 pounds and the
pound is worth $1.60.

A. 16.7%
B. 20.3%
C. 24.1%
D. 41.4%
E. None of the options

($4,096 $3,300)/$3,300 = 0.241, or 24.1%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: International investing - risks, returns, and benefits

46. The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.75. The yield on
a 1-year U.S. bill is 5%. A yield of __________ on a 1-year Canadian bill will make investor indifferent
between investing in the U.S. bill and the Canadian bill.

A. 9.2%
B. 8.3%
C. 6.4%
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D. 11.3%
E. None of the options

1.05 = [($0.75/$0.78)(1 + r)] 1; r = 9.2%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

47. You are a U.S. investor who purchased British securities for 4,000 pounds one year ago when the
British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total
return based on U.S. dollars was __________ if the value of the securities is now 4,400 pounds and the
pound is worth $1.62.

A. 16.7%
B. 18.8%
C. 28.0%
D. 40.0%
E. None of the options

($7,128 $6,000)/$6,000 = 0.188, or 18.8%.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

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

A. 1.6385
B. 2.0411
C. 1.7500
D. 2.3369

1.04/1.06 = x/1.67; x = 1.6385

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Gradable: automatic
Topic: Global parities and relationships

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 Chapter 25 Test Bank - Static Summary

Category # of Questions
AACSB: Knowledge Application 20
AACSB: Reflective Thinking 28
Accessibility: Keyboard Navigation 45
Blooms: Apply 19
Blooms: Remember 28
Blooms: Understand 1
Difficulty: 1 Basic 19
Difficulty: 2 Intermediate 26
Difficulty: 3 Challenge 3
Gradable: automatic 48
Topic: Diversification measures 1
Topic: Exchange quotes, rates, and risks 6
Topic: Global analysis 11
Topic: Global considerations and issues 1
Topic: Global markets 12
Topic: Global parities and relationships 7
Topic: Global risks 1
Topic: Global securities 3
Topic: International investing -- risks, returns, and benefits 6

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