CH19 Flashcards

1
Q

What percentage of all markets do U.S. stock exchanges make up?

A

Roughly 40%.

This highlights the significance of the U.S. markets in the global context.

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2
Q

What is meant by ‘Home Country Bias’?

A

The tendency of investors to favor domestic stocks over foreign ones.

This can lead to a lack of diversification in investment portfolios.

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3
Q

Define exchange rate risk.

A

Uncertainty in asset returns due to movements in exchange rates.

This risk affects international investments significantly.

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4
Q

What is country-specific risk?

A

Risk associated with political events or conditions in a specific country.

Examples include government expropriation and changes in tax policy.

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5
Q

True or False: Imperfect exchange rate risk hedging is easy for equities.

A

False.

It is hard to hedge equities with variable rates of return.

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6
Q

How is the return on foreign investment in domestic currency calculated?

A

Using the formula: E1 + r = (1 + r) × E1.

This reflects the impact of exchange rates on returns.

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7
Q

What happens to the return in U.S. dollars if the dollar depreciates relative to the pound?

A

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.

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8
Q

What is covered interest arbitrage?

A

A strategy to earn riskless profit from discrepancies in interest rates and exchange rates.

It involves borrowing in one currency and investing in another.

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9
Q

What does covered interest parity prevent?

A

It prevents arbitrage opportunities between spot and futures exchange rates.

This is crucial for maintaining balance in international finance.

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10
Q

What is political risk?

A

The possibility of expropriation of assets or changes in the business climate of a country.

It can significantly impact investment decisions.

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11
Q

What are the components of political risk?

A
  • Expropriation of assets
  • Changes in tax policy
  • Restrictions on currency exchange
  • Changes in business climate

These factors can affect foreign investments.

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12
Q

Fill in the blank: The spot-futures exchange rate relationship that prevents arbitrage opportunities is known as _______.

A

[covered interest parity].

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13
Q

What is the formula for calculating the return on foreign investment in foreign currency?

A

E1 + r = (1 + r) × E1.

This formula helps in understanding how exchange rates affect returns.

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14
Q

What is the impact of dollar appreciation on returns from foreign investments?

A

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.

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15
Q

What does the term ‘imperfect exchange rate risk hedging’ refer to?

A

The difficulty in effectively hedging equity investments against exchange rate fluctuations.

This is particularly relevant for equities with variable rates of return.

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16
Q

What is the ‘Bogey’ or Benchmark EAFE index?

A

It represents non-U.S. stocks.

17
Q

What does Currency Selection contribute to in performance attribution?

A

Performance due to currency movements.

18
Q

What does Country Selection contribute to in performance attribution?

A

Performance due to choosing better-performing countries.

19
Q

How is Stock Selection measured in performance attribution?

A

As weighted average of equity returns in excess of equity index in each country.

20
Q

What does Cash/Bond Selection refer to in performance attribution?

A

Excess return due to weighting bonds and bills differently from benchmark weights.

21
Q

Fill in the blank: The contribution to performance from currency movements is known as _______.

A

[Currency Selection]

22
Q

Fill in the blank: Excess return from weighting bonds and bills differently is known as _______.

A

[Cash/Bond Selection]

23
Q

True or False: Stock Selection is measured by the total return of all stocks in a portfolio.

24
Q

What are the components of performance attribution in international investing?

A
  • Currency Selection
  • Country Selection
  • Stock Selection
  • Cash/Bond Selection