Chapter Eight

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					Chapter Seven Test Bank

                                     Chapter Seven

                    International Investment and Diversification

C     1. In the U.S., a typical allocation to international stocks would be
             a. 1-2%
             b. 5-7%
             c. 10-20%
             d. 30-50%

C     2. U.S. equities represent about _________ of the world’s equity capitalization.
            a. 8%
            b. 17%
            c. 51%
            d. 83%

B     3. When the Evans and Archer study is repeated with a security universe that
      includes international securities, the level of systematic risk
             a. increases
             b. decreases
             c. remains unchanged
             d. there is no relation between systematic risk and the Evans and Archer

C     4. For a portfolio with only U. S. securities, market risk accounts for about ___ of
      a security's total risk.
             a. 5%
             b. 17%
             c. 27%
             d. 54%

B     5. A study by Solnik indicates that systematic risk could be reduced to about
      ______ for a portfolio including both U.S. and international stocks.
            a. 6.2%
            b. 11.7%
            c. 19.6%
            d. 27.1%

                                                              Chapter Seven Test Bank

B   6. The correlation among securities on European exchanges is generally
          a. decreasing
          b. increasing
          c. remaining unchanged
          d. cannot be determined

D   7. According to a study by Bruno Solnik, what percentage of total risk can be
    diversified away by holding international securities?
           a. One half
           b. Five eighths
           c. Three fourths
           d. Seven eighths

C   8. Globally, the number of equity securities is about
          a. 100,000
          b. 250,000
          c. 1 million
          d. 100 million

A   9. The changing relationships among currencies of interest to you constitute
    ______ risk.
          a. foreign exchange
          b. political
          c. social
          d. international

B   10. If something costs NZ$110 and the exchange rate between the New Zealand
    dollar and the U. S. dollar is $0.5855/NZ$, what is the cost in U. S. dollars?
           a. $58.55
           b. $64.41
           c. $110.00
           d. $187.88

B   11. Suppose someone holds a security denominated in Australian dollars. If the
    Australian value of the security does not change but the U. S. dollar depreciates
    relative to the Australian dollar, the security holder has a
           a. paper loss
           b. paper gain
           c. realized gain
           d. realized loss

Chapter Seven Test Bank

D     12. An investor purchased a security for ¥10,000 when the exchange rate was
      ¥750/$. He later sold the security for ¥12,000 and the exchange rate had changed
      to ¥850/$. What was the holding period return from a US investor's perspective?
             a. -5.9%
             b. -2.3%
             c. 2.3%
             d. 5.9%

A     13. An investor's exchange rate “frame of reference” is called the
            a. currency of account
            b. exchange rate
            c. nominal rate
            d. international standard

D     14. The nominal rate of interest is a function of all of the following EXCEPT
            a. real rate
            b. inflation rate
            c. risk premium
            d. prime rate

C     15. The current price of a foreign currency is the ___ rate.
            a. forward
            b. futures
            c. spot
            d. delivery

A     16. The contractual rate between a bank and a client for the future delivery of
      foreign exchange is the ___ rate.
             a. forward
             b. futures
             c. spot
             d. delivery

A     17. A U. S. storekeeper who entered into an obligation to pay Swiss francs for a
      delivery of goods could hedge the foreign exchange risk by
             a. entering into a forward contract to buy Swiss francs
             b. entering into a forward contract to deliver Swiss francs
             c. buying a foreign currency which is negatively correlated with the Swiss
             d. buying a foreign currency which is positively correlated with the Swiss

                                                                Chapter Seven Test Bank

A   18. Forward rates reflect differences in
          a. national interest rates
          b. risk premiums
          c. the time value of money
          d. tax treatment

B   19. Inflation in the home country causes the value of the home currency to ____
    in the global market.
            a. appreciate
            b. depreciate
            c. fluctuate
            d. change

D   20. The text described an example of purchasing power parity using
          a. automobiles
          b. bottles of wine
          c. airline tickets
          d. Big Mac hamburgers

B   21. The extent to which you face foreign exchange risk is
          a. nominal risk
          b. exposure
          c. political risk
          d. arbitrage risk

B   22. A foreign currency exchange forward contract priced at a discount means the
          a. forward rate is larger than the spot rate
          b. spot rate is larger than the forward rate
          c. forward rate minus the risk premium is negative
          d. spot rate minus the risk premium is negative

A   23. The type of foreign exchange risk exposure that a portfolio manager is most
    concerned with is
          a. economic exposure
          b. translation exposure
          c. transaction exposure
          d. accounting exposure


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