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LOS j: Calculate the expected return on a stock, given its world market beta and currency exposure as well as the appropriate risk-free rates and risk premiums.
Q1. A Japanese investor is valuing a Korean security. The risk-free rate is 2% in Japan and 3% in Korea. The world market risk premium is 6% and the securities sensitivity to the world market is 1.2. The security is sensitive to changes in the value of two foreign currencies: the Korean won and U.S. dollar. The foreign currency risk premium (SRP) for the won is 2% and the SRP for the U.S. dollar is 1%. The sensitivity to the won is estimated at 1 and the sensitivity to the dollar is estimated at 2. According to the international capital asset pricing model (ICAPM), what is the required return on the security?
A) 13.2%.
B) 10.2%.
C) 3.2%.
Q2. Assume there is a German investor who is restricted to investing only in two currencies—the euro and the U.S. dollar. The U.S. risk-free rate is 3% and the German risk-free rate is 4%. The expected appreciation of the U.S. dollar is 2%. The world portfolio risk premium is 8%. The currency exposures based on euro returns and world betas for three portfolios are as follows:
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A |
B |
C |
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World Beta |
1.2 |
1.4 |
0.8 |
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Currency Exposure |
1.5 |
0.8 |
2.0 |
What is the foreign currency risk premium?
A) 2.0%.
B) 1.0%.
C) ?1.0%.
Q3. What is the expected return of each security to a German investor?
E(RA) E(RB) E(RC)
A) 9.6% 11.2% 6.4%
B) 15.1% 16.0% 12.4%
C) 14.1% 15.0% 11.4%
Q4. Which of the following statements regarding the International Capital Asset Pricing Model (ICAPM) is least accurate? The ICAPM:
A) assumes risk is priced similarly in all markets.
B) is very similar to the domestic CAPM in form, except for an adjustment for currency risk exposure.
C) can be applied to any financial market.
Q5. Song Lee, CFA, is a money manager for a small firm in Seoul. All of Lee’s clients are local. He is considering adding the stock of a U.S. firm, Stockco, to some of his client’s portfolios. Stockco sensitivity to the world index is 0.8 and the risk premium on the index is 6%. The risk-free rate is 3% in the U.S. and 5% in Korea. Stockco is only sensitive to changes in the value of the U.S. dollar. Lee has measured the sensitivity of Stockco to changes in the value of the U.S. dollar to be 1.2. The foreign currency risk premium on the U.S. dollar is 2%. Assuming that Lee uses the international capital asset pricing model (ICAPM), what is the required return on Stockco?
A) 14.2%.
B) 12.2%.
C) 10.2%.
Q6. Lee Okazaki is a Japanese investor who is considering investing in the United States equity and bond market. The world risk premium is 5%. The risk-free rate is 2% in Japan and 3.5% in the U.S. The current exchange rate is 120 yen/$ and the ratio of the price levels of Japan to U.S. consumption baskets is expected to be 120 to 1 in one year. The 1-year interest rate in Japan is 2.5% and the one-year rate is 4% in the U.S. The expected inflation rate in the U.S. is 2% and in Japan the expected inflation rate is 1%.
Okazaki is considering buying common stock in a U.S. firm that has a world beta of 1.1 and an estimated sensitivity of yen-denominated returns to changes in the U.S. dollar of 0.7. What is the required return for this investment?
A) 7.55%.
B) 9.55%.
C) 7.85%.
Q7. Okazaki is also considering the purchase of a United States corporate bond. If the real exchange rate remains constant over the next period, what is Okazaki’s expected return over the next year on the U.S. bond?
A) 4%.
B) 2%.
C) 3%.
Q8. What will the return be for Okazaki on the 1-year bond if the end-of-period exchange rate is 110:1 instead of the beginning-of-period exchange rate of 120:1?
A) ?4.33%.
B) ?1.33%.
C) 8.33%.
Q9. Jaro Sumzinski, who lives in Poland, is applying the international capital asset pricing model (ICAPM) to determine the value of a German security. The German currency (Euro) has a risk premium of 1% and the security has a local currency sensitivity of 0.5. The risk-free rate in Poland is 8% and the risk-free rate in Germany is 4%. The world market risk premium is 7% and the securities sensitivity to the world market is 2. What is the required return of the security?
A) 23.5%.
B) 18.5%.
C) 12.5%.
Q10. Paul Wilkes, a U.S. investor, is interested in investing in securities in the Caribbean country of Grenada. He is convinced that current market conditions make the securities of Grenada very attractive relative to those securities of other countries. Wilkes’ current portfolio is composed entirely of domestic securities, with an allocation of 60% equity and 40% fixed income. Wilkes has little experience in global investing, but has decided that the timing is right to invest at least 10% of his portfolio in foreign assets. Wilkes is particularly attracted to the high rate of return attainable in the Grenada market, but first needs to determine if the additional risk outweighs the return.
After carefully developing his investment criteria and researching the financial markets of Grenada, Wilkes has narrowed his potential investments down to one choice. The secondary markets for equities issued in Grenada are more illiquid than Wilkes had previously thought. This lack of liquidity in the equities market leads Wilkes to determine that equities would be an inappropriate investment for his portfolio. However, bonds issued by the government of Grenada seem to have a history of good liquidity as well as steady returns, both of which are qualities Wilkes is seeking for his portfolio. Wilkes must now use various methods to determine expected returns for these bonds, given a one-year time horizon, expected changes in the U.S./Grenada exchange rates, and inflation rates. Wilkes also must consider the foreign currency risk premium of the issue, and decide if it is appropriate given the additional exposure.
The currency of Grenada is the Eastern Caribbean Dollar (ECD). The current exchange rate is 2.50 USD/ECD. The ratio of the price levels of American goods to Grenadian goods is also 2.50. Inflation in the U.S. is expected to be 2% and 3% in Grenada. The end-of-year expected spot exchange rate is 2.75 USD/ECD. The one-year U.S. (risk free) interest rate is 4%, and in Grenada it is 8%.
Also assume that these two currencies are the only ones that exist. The world portfolio risk premium is 6%. The security Wilkes is interested in is a government issue that has a world beta of 1.25 and currency exposure of 0.80.
What is the beginning of period real exchange rate and the end of period real rate, respectively?
A) 2.50; 2.55.
B) 6.25; 6.94.
C) 1.00; 1.11.
Q11. Has there been a change in the real exchange rate?
A) No, inflation remained constant.
B) Yes, purchasing power has changed.
C) No, the inflation differential compensated for the change in the spot rate.
Q12. For this question, assume the real exchange rate is expected to be constant. What is the expected exchange rate?
A) 2.48.
B) 2.52.
C) 2.40.
Q13. For this question, assume the real exchange rate is expected to be constant. If the U.S. investor wants to buy a bond in Grenada, what would be the approximate expected return of this bond?
A) 8%.
B) 7%.
C) 9%.
Q14. What is the foreign currency risk premium (SRP)?
A) 10.0%.
B) 6.0%.
C) 14.0%.
Q15. Using the international CAPM (ICAPM), what is the approximate expected return on this security?
A) 22.7%.
B) 12.2%.
C) 14.0%. | 
发表于 2009-4-2 13:56
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