Reading 28: The Case for International Diversification LOS

following, efficient, represents, 2009

LOS d: Explain and justify the impact of international diversification on the efficient frontier.

Q1. Which of the following most accurately represents the relationship between the global efficient frontier and a domestic efficient frontier? The global efficient frontier will contain portfolios with:

A) lower risk for a given return and higher return for a given risk level than portfolios on the domestic efficient frontier.

B) lower risk for a given return and lower return for a given risk level than portfolios on the domestic efficient frontier.

C) higher risk for a given return and higher return for a given risk level than portfolios on the domestic efficient frontier.

Q2. Assume that a U.S. investor can invest in two asset classes: Domestic and Foreign Bonds. The data in the following table are risk and return data calculated in U.S. Dollar terms. Given this data, which of the following choices is most likely the correct risk/return combination for a portfolio weighted 50% in domestic bonds and 50% in foreign bonds?

Allocation	Risk (%)	Return (%)
Domestic Bonds Only	7.00	6.50
20% Domestic, 80% Foreign	8.00	10.90
50% Domestic, 50% Foreign	?	?
Foreign Bonds Only	9.00	12.00
	Correlation of domestic & foreign bonds = 0.50

A) Risk of 8.00%, Return of 10.31%.

B) Risk of 7.50%, Return of 9.25%.

C) Risk of 6.95%, Return of 9.25%.

Q3. Relative to the efficient frontier that includes only domestic investments, the efficient frontier that also includes foreign investments will have:

A) higher return and lower risk.

B) higher return and higher risk.

C) lower return and higher risk.

Q4. Relative to the efficient frontier that includes only domestic investments, the efficient frontier that also includes foreign investments will plot to the:

A) left and bottom.

B) left and top.

C) right and top.

Q5. The efficient frontier that includes domestic and foreign investments will reflect which of the following characteristics of foreign investments:

A) higher return opportunities and higher correlations.

B) higher return opportunities and lower correlations.

C) lower return opportunities and higher correlations.