Reading 45: The Case for Inter....Diversification－LOS g against

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 17: Portfolio Management in a Global Context
Reading 45: The Case for International Diversification
LOS g: Critique the traditional case against international diversification.

tycoon

接着上一帖的题

With respect to his comments about the arguments against international diversification, Lewis is:

A) incorrect regarding periods of volatility leading to real long-term increases in underlying correlations; incorrect regarding country-specific performance.

B) correct regarding periods of volatility leading to real long-term increases in underlying correlations; correct regarding country-specific performance.

C) correct regarding periods of volatility leading to real long-term increases in underlying correlations; incorrect regarding country-specific performance.

D) incorrect regarding periods of volatility leading to real long-term increases in underlying correlations; correct regarding country-specific performance.

---

Answer and Explanation

Lewis correlation statement is incorrect. The issue of the stability of correlations among international markets is still unresolved. Although correlations have risen over time, they also appear to increase when volatility increases. This phenomenon occurs due to the econometrics of the correlation measure. Volatility can mask the true correlation. Academic research has found that previously reported increases in correlations during volatile stock markets were manifestations of the volatility and not increases in the true correlations. Lewis country-specific comment is correct; just because a country has outperformed in the past does not mean it will continue to do so. No one country will always deliver the best performance.

---

Which of the items in Exhibit 1 is FALSE?

A) Item 2.

B) Item 1.

C) Item 3.

D) Item 4.

---

Answer and Explanation

Low correlations between markets reduce volatility, but do not directly affect the level of expected return. The inclusion of emerging markets should result in higher expected returns due to their higher expected economic growth, not because they have low correlations with developed markets.

---

Which of Cardozas assertions about using relative value multiples is FALSE?

A) Assertion C.

B) Assertion D.

C) All of Cardozas assertions are true.

D) Assertion B.

---

Answer and Explanation

Although relative value multiples are easy to calculate, the fact that historical data is used is a disadvantage. Historical data may not be relevant to a companys future growth prospects.

tycoon

接着上一帖的题

All of the following typify emerging market risks EXCEPT:

A) local governments may restrict the ability to move capital from the country.

B) free float is low because reverse splits to bolster per share prices occur on a regular basis.

C) closed-end mutual fund returns can fluctuate due to changes in investor supply and demand for these instruments.

D) realized returns from international investing are subject to fluctuations in exchange rates.

---

Answer and Explanation

The proportion of stock publicly traded (free float) is frequently low because the government is often the primary owner of most of a companys stock.

---

Which of the following statements regarding the correlation between stock returns and currency movements is TRUE?

A) Developed markets have a negative correlation between local market returns and currency movements.

B) Emerging markets have a negative correlation between local market returns and currency movements.

C) Both developed and emerging markets have been shown to have a positive correlation between local market returns and U.S. currency movements.

D) Emerging markets have been shown to have a negative correlation between movements in the emerging market country's currency and U.S. stock returns.

---

Answer and Explanation

In developed countries, the correlation between local market returns and currency movements is usually negative, whereas in emerging markets, the local market returns and currency returns are usually positively correlated.

---

Which of the following statements concerning international investing and global investing is FALSE?

A) International investing is principally concerned with diversification across countries.

B) There is no difference between global and international investing.

C) It is possible to invest globally without achieving international diversification.

D) Global investing implies diversification across industries as well as countries.

---

Answer and Explanation

International investing is principally concerned with diversification across countries, while global investing diversifies across industries as well as countries. However, there is no assurance that international diversification will be achieved under a global investing strategyit is possible that the fund manager may decide to commit a disproportionate share of assets to a small set of countries, or even entirely to the investors home country.

tycoon

Which of the following statements with respect to correlations of international security markets is TRUE?

A) The use of historical data will understate the current correlation among assets.

B) Lower correlations are likely in developed world markets.

C) The actions of international investors tend to create lower correlations.

D) Currency risk is about twice that of foreign stock risk.

---

Answer and Explanation

The use of historical data will understate the current correlation because correlations have been increasing over time. Higher correlations are common in developed markets. The actions of international investors result in greater capital mobility and higher correlations. Currency risk is about half that of foreign stock risk.

tycoon

Which of the following countries is most likely to offer the lowest correlation with other capital markets? A country with:

A) few multinational corporations and high tariffs.

B) many multinational corporations and low tariffs.

C) many multinational corporations and high tariffs.

D) few multinational corporations and low tariffs.

---

Answer and Explanation

Countries with few multinational corporations and high tariffs will have segmented capital markets and will be less correlated with other country markets. The higher the proportion of multinational corporations and the more open the capital markets, the more integrated the capital market and the higher the correlation with other country markets.

tycoon

Due to estimation error, the analyst should be aware that estimating correlations during volatile periods results in:

A) lower correlations.

B) the same correlations.

C) higher correlations.

D) correlations that must be adjusted for serial correlation.

---

Answer and Explanation

During periods of increased volatility, correlations will be estimated higher due to estimation error, even if correlations have not actually increased.

tycoon

In order to estimate whether correlations have increased during volatile periods, the analyst should calculate the:

A) correlation between markets.

B) correlation between markets adjusted for the Durbin-Watson statistic.

C) standard deviation of an international portfolio.

D) autoregressive conditional heteroskedasticity.

---

Answer and Explanation

During volatile periods, the correlation will appear to increase, even if it hasnt, due to the econometrics of the correlation measure. The analyst should examine the standard deviation through time to see if it has increased.

tycoon

An analyst examines the correlation of a sample of stock returns and finds that it is 0.60. She then divides the sample in half based on the volatility of stock returns, sample A has the highest volatility and sample B has the lowest volatility. The correlations in sample A and sample B will be, respectively:

A) lower than 0.60, higher than 0.60.

B) higher than 0.60, lower than 0.60.

C) both equal to 0.60.

D) both less than 0.60.

---

Answer and Explanation

Due to the econometrics of the correlation measure, the correlation will be higher when volatility is higher, even if the correlation structure of the underlying data has not changed.

tycoon

Which of the following would be least appropriate for explaining why the benefits of international diversification are overstated?

A) Global trade has increased.

B) Capital has become more mobile globally with more institutional investor involvement.

C) Global markets have become more segmented.

D) Corporations have increased their global merger and acquisition activity.

---

Answer and Explanation

The benefits of international diversification are overstated if the correlations between markets are higher than expected. If markets were segmented, correlations would be lower. The other responses represent causes of increased correlations between markets.

tycoon

Which of the following best describes the properties of the correlation statistic? If a sample of returns is split in half, the high return half will have:

A) lower correlations than the low return half. The true correlation is best measured by the low return half correlation.

B) higher correlations than the low return half. The true correlation is best measured by the whole sample correlation.

C) higher correlations than the low return half. The true correlation is best measured by the low return half correlation.

D) lower correlations than the low return half. The true correlation is best measured by the whole sample correlation.

---

Answer and Explanation

If the sample of returns between two markets is split in half, the high return and higher volatility half will have a higher correlation than the low return half when in fact the true correlation is best measured by the whole sample correlation. This is due to the econometrics of the correlation measure and illustrates the pitfalls of estimating the correlation statistic during periods of increased market volatility. To determine whether markets really have increased their comovement during periods of increased volatility, the analyst should measure the dispersion (standard deviation) of country portfolios.