International Diversification Flashcards
The following are descriptions of?
- Investors frequently overweight home-country stocks. They may even completely ignore opportunities for international diversification.
- Higher transaction costs related to international investments can potentially be an argument for XXX. But on the other side, the transaction costs in the market today are so small, that there are no proof that the transaction costs would be significantly higher.
- Taxation can be an issue for XXX.
Home-country bias
Which two markets do the investment industry commonly distinguish between?
a) Global, national
b) Developed, underdeveloped
c) Developed, emerging
d) Emerging, constant
c) Developed, emerging
A typical emerging economy still is undergoing industrialization, is growing faster than developed economies, and has capital markets that usually entail greater risk.
When a U.S. investor invests abroad, the dollar-denominated return depends on which two factors?
a) Development in US dollars and political factors.
b) Performance of the investment in the local currency and the exchange rate at which that investment can be brought back into dollars.
c) Performance of the investment in the local currency and political factors
d) Political factors and the exchange rate at which that investment can be brought back into dollars.
b) Performance of the investment in the local currency and the exchange rate at which that investment can be brought back into dollars.
For a U.S. investor, the investment in foreign bills is a combination of a safe investment in the foreign country and a risky investment in the performance of the foreign valuta relative to the dollar.
The composite risk rating is a weighted average of which three measure?
Political risk, financial risk and economic risk.
Which of the following are Political risk variables?
a) Investment profile, corruption, socioeconomics conditions.
b) Annual inflation rate, current account balance, GDP per capita
c) Foreign debt, exchange rate stability, net liquidity
a) Investment profile, corruption, socioeconomics conditions.
Which of the following are Financial risk variables?
a) Investment profile, corruption, socioeconomics conditions.
b) Annual inflation rate, current account balance, GDP per capita
c) Foreign debt, exchange rate stability, net liquidity
c) Foreign debt, exchange rate stability, net liquidity
Which of the following are economic risk variables?
a) Investment profile, corruption, socioeconomics conditions.
b) Annual inflation rate, current account balance, GDP per capita
c) Foreign debt, exchange rate stability, net liquidity
b) Annual inflation rate, current account balance, GDP per capita
Match description and performance attribution.
a) Currency selection
b) Country selection
c) Stock selection
d) Cash/ bond selection
i) Measured as the weighted average of equity returns in excess of the equity index in each country.
ii) Measures the contribution to portfolio performance attributable to investing the better-performing stock market of the world.
iii) Measured as the excess return derived from weighting bonds and bills differently from some benchmark weights.
iv) Measures the contribution to total performance attributable to exchange rate fluctuations relative to the investor’s benchmark currency.
a) - iv)
b) - ii)
c) - i)
d) - iii)
________ between countries suggest international diversification is beneficial, especially for active investors. Globalization may have caused higher cross-country correlations. It’s possible to expand the efficient frontier some, as well as reduce _______ risk level below the domestic level.
a) Correlations (beta), systematic
b) Covariances, systematic
c) Alpha, nonsystematic
d) Correlations, nonsystematic
a) Correlations (beta), systematic
What is exchange rate risk?
a) The possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign domestic currency or other changes in the business climate of a country.
b) The relation between spot and forward exchange rates and foreign + domestic interest rates that rules out arbitrage opportunities.
c) The uncertainty in dollar-denominated asset returns due to movements in the exchange rates between the dollar and foreign currencies.
d) All of the above
c) The uncertainty in dollar-denominated asset returns due to movements in the exchange rates between the dollar and foreign currencies.
What is political risk?
a) The possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign domestic currency or other changes in the business climate of a country.
b) The relation between spot and forward exchange rates and foreign + domestic interest rates that rules out arbitrage opportunities.
c) The uncertainty in dollar-denominated asset returns due to movements in the exchange rates between the dollar and foreign currencies.
d) All of the above
a) The possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign domestic currency or other changes in the business climate of a country.
What is the interest rate parity relationship?
a) The possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign domestic currency or other changes in the business climate of a country.
b) The relation between spot and forward exchange rates and foreign + domestic interest rates that rules out arbitrage opportunities.
c) The uncertainty in dollar-denominated asset returns due to movements in the exchange rates between the dollar and foreign currencies.
d) All of the above
b) The relation between spot and forward exchange rates and foreign + domestic interest rates that rules out arbitrage opportunities.
If a foreign exchange risk has been hedged, then information about stock market returns in the _____ currency is informative.
local
When will a dollar-denominated return equal the pound-denominated return?
a) Dollar > Pound
b) Dollar < Pound
c) Exchange rate is unchanged over the invested period
d) This is not possible
c) Exchange rate is unchanged over the invested period
