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周教授CFA金融课程:2021年CFA一二三级系列课程
Global investing is recommended over international diversification because:
A)
corporations are pursuing conglomerate diversification.
B)
governments impose restrictions on the repatriation of capital.
C)
country factors are not as important for stock returns as they once were.



As corporations have become more global, stock returns are more influenced by the industry in which the corporation operates, rather than the country in which the corporation is headquartered. Thus, global investing that diversifies across industries as well as borders, is recommended over traditional international diversification, which diversifies across countries only.

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Global investing refers to diversifying across:
A)
countries.
B)
industries and countries.
C)
industries.



Global investing refers to diversifying across industries as well as countries.

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An investor considers two mutual funds. Mutual Fund A invests in companies around the world, investing in those firms expected to experience superior returns. Mutual Fund B passively invests in companies throughout the world and maintains an exposure to all major industry sectors. Which Mutual Fund will have the lowest amount of unsystematic risk and why?
A)
A, diversifying across borders reduces unsystematic risk.
B)
B, passive investing ensures low unsystematic risk.
C)
B, industry factors have become more important for stock returns.



Mutual Fund B will have the lowest unsystematic risk. To diversify away unsystematic risk, an investor should invest across industries as well as borders. As corporations have become more global, their country of incorporation has less influence on their stock returns. Industry factors have become increasingly important for stock returns as a result. Passive investing only ensures low unsystematic risk when the index being replicated by the passive strategy is well diversified.

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Which of the following best describes the relationship between international diversification and global investing? Global investing diversifies across:
A)
countries and industries. It outperforms international diversification.
B)
countries. It underperforms international diversification.
C)
countries. It outperforms international diversification.



Global investing recognizes the growing importance of industry factors for returns and diversifies across industries and countries. It will provide better diversification than just diversifying across countries (international diversification) as companies are increasingly defined by their industry and less by their country of incorporation.

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A U.S. investor wants to invest internationally to reduce risk and seek higher returns. Which pair of countries’ stock markets would provide the best opportunity to do so?
A)
Germany and Chile.
B)
Great Britain and France.
C)
Germany and France.



As Chile is an emerging country, it will have low correlations and potentially higher returns with Germany and the U.S., compared to the other pairs of developed world markets.

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Which of the following statements regarding the unsystematic risk of investing in emerging markets is CORRECT? It is:
A)
negligible.
B)
largely diversified away due to low correlations with developed world markets.
C)
still predominant in a large portfolio.



The unsystematic risk arising from emerging markets is largely diversified away in a portfolio of international assets due to low correlations with the developed world.

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Which of the following best describes investing in emerging markets?
A)
Emerging markets have high stand alone risk but have a low correlation with developed world markets. This makes them an attractive addition to a portfolio.
B)
Emerging markets have low stand alone risk and low correlation with developed world markets. This makes them an attractive addition to a portfolio.
C)
Emerging markets have high stand alone risk and a high correlation with developed world markets. Their risk does not justify their addition to a portfolio.



Emerging markets have high stand alone risk but have a low correlation with developed world markets. Their contribution to portfolio risk is not as much as commonly expected. They also have high expected returns. This makes them an attractive addition to a portfolio.

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Which of the following best describes investing in emerging markets?
A)
Emerging markets are segmented from developed world markets. They are priced according to their standard deviation.
B)
Emerging markets are integrated with developed world markets. They are priced according to their contribution to portfolio risk.
C)
Emerging markets are segmented from developed world markets. They are priced according to their contribution to portfolio risk.



Emerging markets are segmented from developed world markets. Due to this segmentation, they have a low correlation with developed world markets. They should be priced according to their contribution to portfolio risk, but instead are priced according to their standard deviation (stand alone risk). This results in them having high expected returns.

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Nancy Sims and Janice Davis are investment analysts for Platinum Investment Advisors. Platinum provides investment advice regarding U.S. and non-U.S. market assets for U.S. investors. They attempt to exploit foreign asset and currency misvaluations whenever possible. Sims specializes in advising on tactical asset allocations and Davis specializes in strategic asset allocations. They analyze both developed and emerging market investments.
Davis is considering adding a portfolio of Korean stocks to a portfolio of U.S. stocks. She gathers the following information on the expected returns, standard deviations, correlations of the current U.S. portfolio and the Korean portfolio. The returns for the Korean portfolio are in U.S. dollar terms. She is considering weighting the overall portfolio so that 70 percent of its assets are in the U.S. and 30 percent are in Korea .
   U.S.
portfolio
Korean
portfolio
Expected Return   8.00%12.00%
Standard Deviation   22.00%32.00%
Correlation   0.60

Sims is considering adding a Japanese stock to a portfolio of U.S. stocks. She is concerned, however, as to what the effect would be on the portfolio’s return from changes in the value of the yen. She gathered the following figures for both the asset and currency for the Japanese investment.
Return on Japanese stock in yen   16%
Beginning spot rate (yen/$)   100
Ending spot rate (yen/$)   125

Another area of interest for Platinum is the Taiwan market. As part of their investigation into the attractiveness of these markets, Sims has been asked to evaluate Taiwanese stocks and the effect of currency risk on the risk of these investments. The standard deviation of the Taiwanese stocks in Taiwanese dollars (TWD) terms is 20 percent. The standard deviation of the U.S. dollar/TWD exchange rate is 15 percent. The correlation between the exchange rate and Taiwanese stock portfolio is 0.4.
In response to an advertisement that Platinum posted on a well-know financial news website, Sims has been contacted by a potential client, Louis Baldi. Baldi would like to know why he should diversify internationally when the U.S. markets have had higher returns than other markets over the past decade. Sims answers that it is difficult to predict the future, and that just because a market has outperformed in the past does not mean that it will outperform in the future. Sims adds that Baldi’s argument against international diversification, known as the “country-specific out-performance” argument was especially popular during the 1990s when the U.S. markets had an extremely long bull run. Davis adds that Baldi needs to diversify across not only countries, but also industries.
What is the expected return on the portfolio of U.S. and Korean assets that Davis is considering?
A)
9.2%.
B)
8.8%.
C)
10.0%.



The expected return of the portfolio is a weighted average of the asset returns: (0.70 × 8%) + (0.30 × 12%) = 9.2%. (Study Session 8, LOS 22.a)

What is the standard deviation of the portfolio of U.S. and Korean assets that Davis is considering?
A)
22.5%.
B)
5.0%.
C)
27.0%.



To calculate the standard deviation of the portfolio, use both the individual stocks risk as well as the correlation between them in the following formula for portfolio variance: (0.702 × 0.222) + (0.302 × 0.322) + (2 × 0.70 × 0.30 × 0.22 × 0.32 × 0.6) = 0.0237 + 0.0092 + 0.0177 = 0.0507. We then take the square root of 0.0507 to obtain the standard deviation of 22.5%. Notice that this is much less than the standard deviation of 32% on the Korean asset. (Study Session 8, LOS 22.a)

What is the expected return on the Japanese stock that Sims is considering?
A)
39.2%.
B)
45.0%.
C)
-7.2%.



The expected return on the Japanese stock in U.S. dollar terms must consider both the return on the asset in yen terms and the change in the value of the yen. The change in the value of the yen is calculated as follows: ((1/125) – (1/100)) / (1/100) = -20%. The return in U.S. dollar terms is then: (1.16)(1-.20)-1 = -7.20%. (Study Session 8, LOS 22.b)

What is the contribution of currency risk for the Taiwanese stocks that Sims is considering?
A)
5.0%.
B)
8.7%.
C)
9.4%.



The risk of the Taiwanese stocks in U.S. dollar terms must consider both the risk of the TWD and the correlation between the TWD and the Taiwanese stocks. The variance of these investments in U.S. dollar terms is: 0.202 + 0.152 + (2 × 0.20 × 0.15 × 0.4) = 0.0865. The standard deviation in U.S. dollar terms is then the square root of the variance: 0.08651/2 = 29.41%. The contribution of currency risk is then: 29.4% - 20.0% = 9.4%. Note that this is much less than the 15% that might otherwise be expected as being the risk of the TWD. (Study Session 8, LOS 22.c)


When investing in foreign markets Sims and Davis should be aware of the correlation between the asset and currency. In developed and emerging markets, what is the typical correlation between the asset and currency?
DevelopedEmerging
A)
NegativePositive
B)
PositiveNegative
C)
PositivePositive



In developed markets, the typical correlation between the asset and currency is negative, with the logic being that when the currency depreciates, the firms in those markets can export more and their stock rises. In emerging markets though, currency devaluations are often accompanied by a lack of confidence in the stock markets, so the correlation is positive. This suggests that currency risk is a greater concern in emerging markets. (Study Session 8, LOS 22.j)

With respect to Sims’ and Davis’ responses to Baldi’s comments:
A)
Sims is correct; Davis is correct.
B)
Sims is correct; Davis is incorrect.
C)
Sims is incorrect; Davis is correct.



Sims is correct. Although the “country-specific out-performance” argument appears attractive when the investor’s home market is doing quite well, past performance is no guarantee of future results. Davis is also correct. An investor needs to diversify across borders and industries. As the world economy and stock markets have become more interconnected, simply diversifying across borders is not as effective as it once was. Increasingly stock returns are determined by the industry the firm is in. Therefore the investor should also diversify across industries. This form of diversification is termed “global” diversification, as opposed to “international” diversification that only diversifies across borders. (Study Session 8, LOS 22.j)

TOP

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%.



Waite forgot to take into account the impact of the percentage change in the dollar value of the foreign currency. Using the information provided by King, we can determine the percentage change in the value of the foreign currency and then calculate Waite's total dollar return. Use the formula for total dollar return:
This may be calculated as:

R$ = RLC + S + RLCSwhere:
R$ = Return on foreign asset in U.S. dollar terms
RLC = Return on foreign asset in local currency terms
S = Percentage change in foreign currency

Return on King’s bond = (8.0 + 98.0 – 95.0) / 95.0 = 0.115789
Solving for S we get:
R$ King = 0.115789 + S + 0.115789S
-0.1074 = 0.115789 + 1.115789S
-0.22319 = 1.115789S

S = -0.20 or 20.0% depreciation of the foreign currency.

Now, Waite’s total dollar return can be computed.

Return on Waite’s bond in the local currency = (8.5 + 98.0 - 96.5) / 96.5 = 0.103627
R$ Waite = 0.103627 – 0.20 + (.1036)(-0.20)

= 0.103627 - 0.20 - 0.02072 = -0.117 or -11.7%

(Study Session 8, LOS 22.b)


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.



Even among countries with similar government regulations, fiscal policies, and monetary policies, such as the G-7 countries, the correlations can be sufficiently low to offer diversification opportunities. (Study Session 8, LOS 22.a)

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.



International bond market correlations can be lower than international equity markets due to differing government fiscal and monetary policies. Thus adding international bonds to a global portfolio offers opportunities for lower risk and higher return. (Study Session 8, LOS 22.a)


Which of the following is NOT a common method used to limit the extent of foreign influence in an emerging market?
A)
Restricting or limiting foreign ownership of stocks in sensitive industries such as banking or defense.
B)
Discriminatory taxes being applied to foreign investors.
C)
Limiting ownership to private investors.



In an attempt to keep capital in their countries, many governments of developing economies place restrictions on the repatriation of capital and profits. Other methods that a developing country may use to maintain control of its market include:
  • Blocking or limiting foreign ownership of stock in sensitive industries such as banking and defense.
  • Discriminatory taxes are sometimes applied to foreign investors.
  • Limiting foreign investment to authorized investors which are usually institutional investors.
  • Restricting foreign ownership in a corporation to a minority of outstanding shares.


(Study Session 8, LOS 22.j)


What is the standard deviation and expected return of the two-stock portfolio?
Standard DeviationExpected Return
A)
24.431%10.6%
B)
0.244%11.4%
C)
5.960%10.6%



σ2port = w2u.s.σ2u.s. + w2eσ2e + 2wu.s.weσu.s.σe ρu.s.,e
σ2port = (0.7)2(0.23)2 + (0.3)2(0.37)2 + (2)(0.7)(0.3)(0.23)(0.37)(0.6)
σ2port = 0.0596872
σ= √σ2port = √0.0596872 = 0.2443096 = 24.431%
Expect return = wu.s.E(Ru.s.) + weE(Re)
= (0.7)(0.10) + (0.3)(0.12) = 10.6%
(Study Session 8, LOS 22.j)


Which of the following statements about the benefits and risks of international diversification is CORRECT?
A)
The benefits of international diversification as demonstrated by mean-variance analysis could be overstated if return distributions are leptokurtic.
B)
One of the primary arguments in favor of international diversification is that global markets are becoming integrated and the mobility of capital has increased.
C)
Increased correlations calculated during periods of rising volatility are indicative that the true correlation of returns between markets is changing.



Having a leptokurtic distribution means that the probability of large positive and large negative returns is greater than under a normal distribution. If large negative events occur more frequently than assumed by mean-variance analysis, the case for global diversification is weakened. One of the primary arguments against international diversification is that global markets are becoming integrated and the mobility of capital has increased. The problem with estimating correlation during periods of rising volatility is that the correlation will be biased upwards when in fact it has not changed. Therefore, an argument against international diversification may not be valid if it relies on correlations calculated during volatile periods. (Study Session 8, LOS 22.g)

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