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LOS f: Explain why currency risk should not be a significant barrier to international investment. ffice ffice" />
Q1. Which of the following statements regarding international diversification is least accurate?
A) Foreign currency risk will diversify the risk from domestic government monetary and fiscal policies.
B) A depreciating foreign currency benefits the international investor.
C) Foreign currency risk and foreign asset risk are not additive.
Correct answer is B)
A depreciating foreign currency harms the international investor by resulting in a lower home currency return. Foreign currency risk and foreign asset risk are not additive because the correlations between them are usually quite low, and sometimes negative. Foreign currency risk also helps diversify domestic fiscal and monetary policies.
Q2. The following data applies to a foreign stock investment:
- The gain on the stock in foreign currency terms was 15%.
- The foreign currency has depreciated by 8%.
- The standard deviation of stock returns was 35% and the standard deviation of the foreign currency was 11%.
- The correlation between the stock returns and the currency is 0.10.
What is the expected return of the portfolio?
A) 5.80%.
B) 24.20%.
C) 7.00%.
Correct answer is A)
To obtain the return in domestic currency terms use the following formula that considers the return in local currency terms as well as the exchange rate change:
15% - 8% + (15% × - 8%) = 5.80%
Q3. The following data applies to a foreign stock investment:
- The gain on the stock in foreign currency terms was 22%.
- The foreign currency has appreciated by 7%.
- The standard deviation of stock returns was 38% and the standard deviation of the foreign currency was 24%.
- The correlation between the stock returns and the currency is 0.10.
What is the expected return of the portfolio?
A) 13.46%.
B) 30.54%.
C) 29.00%.
Correct answer is B)
To obtain the return in domestic currency terms use the following formula that considers the return in local currency terms as well as the exchange rate change:
22% + 7% + (22% × 7%) = 30.54%
Q4. Joe Murad, a ffice:smarttags" />U.S. investor, invested in foreign securities. The following data is available:
- The return on stock in foreign currency terms was 14%.
- The foreign currency depreciated by 5%.
- The standard deviation of stock returns was 30%.
- The standard deviation of the foreign currency was 10%.
- The correlation between the stock return and the currency was 0.30.
Murad’s return on his foreign securities investment is:
A) 9.70%.
B) 9.00%.
C) 8.30%.
Correct answer is C)
Use the following formula to compute the return in dollars:
R$ = RLC + S + (RLC)(S)
R$ = return on the foreign asset in U.S. dollar terms
RLC = return on the foreign asset in local currency terms
S = percentage change in the foreign currency
Return = 0.14 + (-0.05) + (0.14) (-0.05) = 8.30%
Q5. The risk of the portfolio in U.S. dollar terms as measured by its standard deviation is:
A) 11.80%.
B) 36.75%.
C) 34.35%.
Correct answer is C)
The formula used below considers the risk of the asset in foreign currency terms, the risk of the foreign currency, and the correlation between the two:
σ2$ = σ2LC + σ2S + 2σLCσSρLC,S
where:
σ2$ = variance of the returns on the foreign asset in U.S. dollar terms
σ2LC, σLC = variance and standard deviation of the foreign asset in local currency terms
σ2S, σS = variance and standard deviation of foreign currency
ρLC,S = correlation between returns for the foreign asset in local currency terms and movements in the foreign currency.
Variance = (0.30)2 + (0.10)2 + 2(0.3)(0.1)(0.3) = 0.118
Standard deviation = √(0.118) = 34.35%
Q6. The contribution of currency risk to the risk of the portfolio is closest to:
A) 4.00%.
B) 4.35%.
C) 5.00%.
Correct answer is B)
The contribution of the currency risk is the difference between the asset risk in domestic currency terms less the risk of the foreign asset in foreign currency terms.
Contribution of currency risk = σ$ - σLC
Contribution of currency risk = 34.35% - 30.00% = 4.35%
[此贴子已经被作者于2009-3-5 16:50:56编辑过] | 
发表于 2009-3-5 16:44
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