CH19 Flashcards
What percentage of all markets do U.S. stock exchanges make up?
Roughly 40%.
This highlights the significance of the U.S. markets in the global context.
What is meant by ‘Home Country Bias’?
The tendency of investors to favor domestic stocks over foreign ones.
This can lead to a lack of diversification in investment portfolios.
Define exchange rate risk.
Uncertainty in asset returns due to movements in exchange rates.
This risk affects international investments significantly.
What is country-specific risk?
Risk associated with political events or conditions in a specific country.
Examples include government expropriation and changes in tax policy.
True or False: Imperfect exchange rate risk hedging is easy for equities.
False.
It is hard to hedge equities with variable rates of return.
How is the return on foreign investment in domestic currency calculated?
Using the formula: E1 + r = (1 + r) × E1.
This reflects the impact of exchange rates on returns.
What happens to the return in U.S. dollars if the dollar depreciates relative to the pound?
The return increases when converted back to U.S. dollars.
Example: If you earn 10% on a British security and the exchange rate changes favorably.
What is covered interest arbitrage?
A strategy to earn riskless profit from discrepancies in interest rates and exchange rates.
It involves borrowing in one currency and investing in another.
What does covered interest parity prevent?
It prevents arbitrage opportunities between spot and futures exchange rates.
This is crucial for maintaining balance in international finance.
What is political risk?
The possibility of expropriation of assets or changes in the business climate of a country.
It can significantly impact investment decisions.
What are the components of political risk?
- Expropriation of assets
- Changes in tax policy
- Restrictions on currency exchange
- Changes in business climate
These factors can affect foreign investments.
Fill in the blank: The spot-futures exchange rate relationship that prevents arbitrage opportunities is known as _______.
[covered interest parity].
What is the formula for calculating the return on foreign investment in foreign currency?
E1 + r = (1 + r) × E1.
This formula helps in understanding how exchange rates affect returns.
What is the impact of dollar appreciation on returns from foreign investments?
The return decreases when converted back to U.S. dollars.
Example: If you earn 10% on a British security and the exchange rate changes unfavorably.
What does the term ‘imperfect exchange rate risk hedging’ refer to?
The difficulty in effectively hedging equity investments against exchange rate fluctuations.
This is particularly relevant for equities with variable rates of return.
What is the ‘Bogey’ or Benchmark EAFE index?
It represents non-U.S. stocks.
What does Currency Selection contribute to in performance attribution?
Performance due to currency movements.
What does Country Selection contribute to in performance attribution?
Performance due to choosing better-performing countries.
How is Stock Selection measured in performance attribution?
As weighted average of equity returns in excess of equity index in each country.
What does Cash/Bond Selection refer to in performance attribution?
Excess return due to weighting bonds and bills differently from benchmark weights.
Fill in the blank: The contribution to performance from currency movements is known as _______.
[Currency Selection]
Fill in the blank: Excess return from weighting bonds and bills differently is known as _______.
[Cash/Bond Selection]
True or False: Stock Selection is measured by the total return of all stocks in a portfolio.
False
What are the components of performance attribution in international investing?
- Currency Selection
- Country Selection
- Stock Selection
- Cash/Bond Selection
