Reading 68: International Asset Pricing Los i~Q1-4

returns, capital, relation, expected

LOS i: State the risk pricing relation and the formula for the international capital asset pricing model (ICAPM).

Q1. The international capital asset pricing model (ICAPM) expresses expected returns as:

A) E(R) = (b × MRP) + (γ₁× FCRP₁) + (γ₂× FCRP₂) + … + (γ_k× FCRP_k).

B) E(R) = R_F + (γ₁× FCRP₁) + (γ₂× FCRP₂) + … + (γ_k× FCRP_k).

C) E(R) = R_F + (b × MRP) + (γ₁× FCRP₁) + (γ₂× FCRP₂) + … + (γ_k× FCRP_k).

Q2. In a two-currency world, the international capital asset pricing model expresses expected returns as:

A) E(R) = R_F + (b × MRP) + (γ_LC× FCRP_LC) + (γ_FC× FCRP_FC).

B) E(R) = R_F + (γ_LC× FCRP_LC) + (γ_FC× FCRP_FC).

C) E(R) = R_F + (b × MRP) + (γ_FC× FCRP_FC).

Q3. Which of the following assumptions is needed to justify the international capital asset pricing model (ICAPM)? In the ICAPM, the risk-free rate is:

A) LIBOR-based, and the market portfolio is the market capitalization weighted portfolio of all risky assets in the world.

B) the investor’s domestic risk-free rate, and the market portfolio is the market capitalization weighted portfolio of all risky assets in the world.

C) the investor’s domestic risk-free rate, and the market portfolio is the market capitalization weighted portfolio of all risky assets in the domestic market.

Q4. Which of the following statements related to the International Capital Asset Pricing Model (ICAPM) is least accurate?

A) Investors are concerned with nominal returns in their home currency.

B) Expected return for any asset is a function of the U.S. Treasury rate, the world market risk premium, and the sensitivity of the asset to changes in all other foreign currencies.

C) All investors should hold some combination of their domestic risk-free asset and the world portfolio.