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LOS c: Evaluate the contribution of currency risk to the volatility of an international security position.
Q1. 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 contribution of currency risk?
A) 2.72%.
B) 11.00%.
C) 37.72%.
Q2. The following data applies to a foreign stock investment:
- The loss on the stock in foreign currency terms was 12%.
- The foreign currency has depreciated by 6%.
- The standard deviation of stock returns was 33% and the standard deviation of the foreign currency was 14%.
- The correlation between the stock returns and the currency is 0.20.
What is the risk of the portfolio in U.S. dollar terms as measured by the standard deviation?
A) 14.70%.
B) 5.34%.
C) 38.34%.
Q3. The following data applies to a foreign stock investment:
- The loss on the stock in foreign currency terms was 12%.
- The foreign currency has depreciated by 6%.
- The standard deviation of stock returns was 33% and the standard deviation of the foreign currency was 14%.
- The correlation between the stock returns and the currency is 0.20.
What is the expected return of the portfolio?
A) -17.28%.
B) -18.72%.
C) -18.00%.
Q4. While in the managerial training program for a large multinational financial services corporation, Galaxi, Inc. (Galaxi), Daniel Waite is assigned to a one-year rotation in the Mediterranean division. Upon arriving at his assignment, Waite purchases a local (foreign currency) bond with an annual coupon of 8.5% for 96.5.
One of Waite’s clients asks him to create a concentrated, two asset portfolio consisting of one European stock and one U.S. stock. Pertinent information on the two stocks and the portfolio is given below:
- Expected return of the U.S. stock = 10% with a standard deviation of 23%
- Expected return of the European stock = 12% with a standard deviation of 37%
- Correlation between the two stocks = 0.60
- Weight of the U.S. stock in the portfolio = 70%
- Weight of the European stock in the portfolio = 30%
After completing his training program in the Mediterranean division, it is now time to return to the U.S. Waite sells the bond he purchased when he arrived (a one year holding period) for 98.0. Waite is pleased with his return, which he calculates at 10.4%.
On the plane ride home, Waite sits next to his co-worker, Penny King. Waite and King naturally begin to chat about their experience abroad. King brings up the depressed economic conditions in the Mediterranean and the negative returns she experienced on her local bond investments. She states that her total dollar return on an 8.0% annual coupon bond purchased at the same time as Waite's for 95.0 and sold for 98.0 (at the same time as Waite's) was a disappointing negative 10.74%.
Waite and King turn their discussion to international investing in general. They agree that, despite the increased integration of world markets, investors can benefit from global investing.
“Equity market correlations continue to be low due to a number of factors”, comments King. “There are so many differences in cultural mores, technology, government regulations, and monetary policy that most national economies still move independently of one another. International diversification works.”
“I don’t think that’s entirely true” responds Waite. “If you look at countries like the G-7, with similar government regulations, fiscal philosophies, and monetary policies, then there really isn’t much diversification effect. The correlations aren’t low enough. You have to be quite selective about which foreign markets you get into. Then diversification can really pay off.”
At their layover stop in London, Waite and King unexpectedly meet another colleague from work, Miko Katori. Katori just completed a two year term in Galaxi’s Tokyo office and has been assigned to London. At lunch Katori tells King and Waite about some of the assignments she worked on during the past two years. She is particularly excited about her personal research. “I did a fascinating study using twenty years of bond data and discovered that the correlations between international bond markets can be lower than the correlation between international stock markets. From this I concluded that adding international bonds to a portfolio will reduce risk but not increase return due to the lower returns on bonds compared to equities”
Assume that King’s calculation is correct and that Waite made a calculation error. Which of the following is closest to Waite’s actual total dollar return?
A) -11.7%.
B) -32.4%.
C) -10.4%.
Q5. Regarding the statements by Waite and King on the topic of international investing:
A) only one is correct.
B) both are correct.
C) both are incorrect.
Q6. With respect to Katori’s research, critique her statements regarding her conclusions regarding international bonds in a portfolio context with respect to lower correlations and lower returns.
A) both are correct.
B) only one is correct.
C) both are incorrect.
Q7. Which of the following is NOT a common method used to limit the extent of foreign influence in an emerging market?
A) Limiting ownership to private investors.
B) Restricting or limiting foreign ownership of stocks in sensitive industries such as banking or defense.
C) Discriminatory taxes being applied to foreign investors.
Q8. What is the standard deviation and expected return of the two-stock portfolio?
Standard Deviation Expected Return
A) 24.431% 10.6%
B) 0.244% 11.4%
C) 5.960% 10.6%
Q9. Which of the following statements about the benefits and risks of international diversification is TRUE?
A) One of the primary arguments in favor of international diversification is that global markets are becoming integrated and the mobility of capital has increased.
B) The benefits of international diversification as demonstrated by mean-variance analysis could be overstated if return distributions are leptokurtic.
C) Increased correlations calculated during periods of rising volatility are indicative that the true correlation of returns between markets is changing.
Q10. According to a study on bond returns during the period 1987-1996, the U.S. dollar generally weakened relative to the other countries in the study (specifically, Canada, Euro area, Japan and the U.K.). Which of the following statements regarding the impact of exchange rates on security returns is TRUE?
A) Exchange rates have little impact on returns.
B) When the home currency is weakening, the investor should invest more in foreign bonds.
C) When the home currency is weakening, the investor should invest less in foreign bonds.
Q11. All of the following are reasons investors should consider constructing global portfolios EXCEPT:
A) reduced foreign exchange risk. Spreading assets over multiple currencies dampens portfolio volatility.
B) additional choice. Markets outside the U.S. represent more than 50% of available investment choices.
C) non-U.S. securities often outperform U.S. securities.
Q12. Which of the following statements concerning currency risk is most accurate? Currency risk:
A) slightly reduces the risk of foreign investments through diversification of the asset risk.
B) slightly magnifies the risk of foreign investments.
C) greatly magnifies the risk of foreign investments. | 
发表于 2009-3-5 16:31
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