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LOS a: Evaluate the implications of international diversification for domestic equity and fixed income portfolios, based on the traditional assumptions of low correlations across international markets. ffice ffice" />
Q1. A domestic stock has an expected return of 12% and a standard deviation of 18%. A foreign stock has an expected return of 25% and a standard deviation of 33%. An investor has 60% of the domestic stock in their portfolio and 40% in the foreign stock. If the correlation between the stocks is 0.70, what is the portfolio’s standard deviation?
A) 24.00%.
B) 17.20%.
C) 22.15%.
Correct answer is C)
The standard deviation of the portfolio will be a function of the weights in the assets, their risk, and the correlation between them. It is calculated as:
Q2. Which of the following is NOT a reason why investors should consider constructing global portfolios?
A) Lower correlations between international assets.
B) Increasingly integrated global capital markets.
C) Appreciating foreign currencies.
Correct answer is B)
Global diversification is attractive because foreign markets offer lower correlations and the opportunity for higher return. If the foreign currency appreciates, the domestic investor will also benefit. Increasingly integrated global capital markets would actually harm the investor because correlations would increase.
Q3. Which of the following would benefit an investor who is considering foreign markets?
A) Depreciating foreign currencies.
B) Withholding taxes on foreign investments.
C) Lower correlations between international assets.
Correct answer is C)
Lower correlations would result in reduced portfolio risk for the global investor. The other answer choices would actually be a detriment for an investor considering foreign markets. Foreign governments sometimes tax the interest and dividends earned by investors, thereby reducing investment return. A depreciating foreign currency would lower the dollar denominated return to a ffice:smarttags" />U.S. investor who invests globally.
Q4. Which of the following arguments makes the case for international diversification?
A) The presence of increased Sharpe ratios with international investing.
B) Correlations are said to have increased over time.
C) Corporations are becoming more global in their orientation.
Correct answer is A)
Higher Sharpe ratios imply a higher excess return per level of risk. If correlations have increased over time, then the risk reduction benefit of international diversification is curtailed. If corporations become more global, it would also imply higher correlations, thus diversifying across borders becomes a less effective method of decreasing portfolio risk.
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发表于 2009-3-5 16:23
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