Reading 28: The Case for International Diversification LOS

currency, following, mobility

LOS b: Distinguish between the asset return and currency return for an international security.

Q1. Which of the following with respect to correlations of international security markets is FALSE?

A) Greater capital mobility leads to increased correlations.

B) Trade agreements lead to increased correlations.

C) Low correlations have been especially valuable to the international investor during times of crisis.

Q2. Which of the following statements regarding foreign currency risk is FALSE? Foreign currency risk:

A) is about twice that of foreign bond risk.

B) is about twice that of foreign stock risk.

C) is often diversified away in a portfolio of foreign assets.

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 contribution of currency risk?

A) 8.93%.

B) 46.93%.

C) 22.02%.

Q4. A U.S. investor holds assets denominated in British pounds. A 10% increase in the value of the assets in pounds and a 5% increase in the $/? exchange rate will lead to what total return to the U.S. investor in terms of dollars?

A) 15.5%.

B) 4.5%.

C) 5.5%.

Q5. A French investor earned a 12% return, in terms of Euros, on an investment in dollar assets in the U.S. If the return on the investment in dollars was 6%, then the change in the exchange rate:

A) must have been greater than 6%.

B) must have been less than 6%.

C) must have been equal to 6%.

Q6. A British investor holds assets denominated in euros. A 5% decrease in the value of the assets in euros and a 5% increase in the ?/