Ch015-International-Portfolio-Investments

Eun/Resnick4e187Eun&Resnick4eCHAPTER15InternationalPortfolioInvestmentsInternationalCorrelationStructureandRiskDiversificationOptimalInternationalPortfolioSelectionEffectsofChangesintheExchangeRateInternationalBondInvestmentInternationalMutualFunds:APerformanceEvaluationInternationalDiversificationthroughCountryFundsInternationalDiversificationwithADRsInternationalDiversificationwithWEBSInternationalFinanceinPractice:LiveHere,InvestAbroadInternationalDiversificationwithHedgeFundsWhyHomeBiasinPortfolioHoldings?InternationalFinanceinPractice:Stay-at-HomeShareholdersSummaryMINICASE:SolvingfortheOptimalInternationalPortfolioAppendix15A:InternationalInvestmentwithExchangeRiskHedgingAppendix15B:SolvingfortheOptimalPortfolioInternationalCorrelationStructureandRiskDiversification1Inthecontextofinvestmentsinsecurities(stocksandbonds),portfolioriskdiversificationrefersto:a)thetime-honoredadage“Don’tputallyoureggsinonebasket”b)investors’abilitytoreduceportfolioriskbyholdingsecuritiesthatarelessthanperfectlypositivelycorrelatedc)thefactthatthelesscorrelatedthesecuritiesinaportfolio,thelowertheportfolioriskd)alloftheaboveAnswer:d)2Inthegraphatright,XandYrepresenta)U.S.stocksandinternationalstocksb)internationalstocksandU.S.stocksc)systematicriskandunsystematicriskd)noneoftheaboveAnswer:a)0.270.12PortfolioRisk(%)NumberofStocks11020304050XYEun/Resnick4e1883Youwillgetmorediversificationa)acrossindustriesthanacrosscountriesb)acrosscountriesthanacrossindustriesc)acrossstocksandbondsthanacrosscountriesd)noneoftheaboveAnswer:b)4Systematicriskis:a)nondiversifiableriskb)theriskthatremainsevenafterinvestorsfullydiversifytheirportfolioholdingsc)aandbd)noneoftheaboveAnswer:c)5The“worldbeta”measuresthea)unsystematicriskb)sensitivityofreturnsonasecuritytoworldmarketmovementsc)risk-adjustedperformanced)riskofdefaultandbankruptcyAnswer:b)6Thelesscorrelatethesecuritiesinaportfolio,a)Thelowertheportfolioriskb)Thehighertheportfolioriskc)Thelowertheunsystematicrisk.d)Thehigherthediversifiablerisk.Answer:a)7Regardingthemechanicsofinternationalportfoliodiversification,whichstatementistrue?a)Securityreturnsaremuchlesscorrelatedacrosscountriesthanwithinacounty.b)Securityreturnsaremorecorrelatedacrosscountriesthanwithinacounty.c)Securityreturnsareaboutasequallycorrelatedacrosscountriesastheyarewithinacounty.d)NoneoftheaboveAnswer:a)8Systematicriska)Isalsoknownasnon-diversifiablerisk.b)Ismarketriskc)Referstotheriskthatremainsevenafterinvestorsfullydiversifytheirportfolioholdings.d)AlloftheaboveAnswer:d)Eun/Resnick4e1899AfullydiversifiedU.S.portfolioisabouta)75percentasriskyasatypicalindividualstock.b)27percentasriskyasatypicalindividualstock.c)12percentasriskyasatypicalindividualstock.d)HalfasriskyasafullydiversifiedinternationalportfolioAnswer:b)10Studiesshowthatinternationalstockmarketstendtomovemorecloselytogetherwhenthevolatilityishigher.Thisfindingsuggeststhata)Investorsshouldliquidatetheirportfolioholdingsduringturbulentperiods.b)Sinceinvestorsneedriskdiversificationmostpreciselywhenmarketsareturbulent,theremaybelessbenefittointernationaldiversificationforinvestorswholiquidatetheirportfolioholdingsduringturbulentperiods.c)Thiskindofcorrelationiswhyinternationalportfoliodiversificationissmartfortoday’sinvestor.d)NoneoftheaboveAnswer:b)OptimalInternationalPortfolioSelection11The“Sharpeperformancemeasure”(SHP)is:a)a“risk-adjusted”performancemeasureb)theexcessreturn(aboveandbeyondtherisk-freeinterestrate)perstandarddeviationriskc)thesensitivitylevelofanationalmarkettoworldmarketmovementsd)a)andb)Answer:d)12Withregardtoestimatesof“worldbeta”measuresofthesensitivityofanationalmarkettoworldmarketmovements,a)TheJapanesestockmarketisthemostsensitivetoworldmarketmovementsb)TheU.S.stockmarketistheleastsensitivetoworldmarketmovementsc)Botha)andb)d)NoneoftheaboveAnswer:c)13The“Sharpeperformancemeasure”(SHP)is:a)()SHPifiRRb)2()SHPifiRRc)SHPififReRed)noneoftheaboveAnswer:a)Eun/Resnick4e19014Themeanandstandarddeviation(SD)ofmonthlyreturns,overagivenperiodoftime,forthestockmarketsoftwocountries,XandYareCountryMean(%)SD(%)X1.574.87Y1.927.64Assumingthatthemonthlyrisk-freeinterestrateis0.25%,theSharpeperformancemeasures,SHP(X)andSHP(Y),andtheperformanceranks,respectively,forXandYare:a)SHP(X)=0.271,rank=1,andSHP(Y)=0.219,rank=2b)SHP(X)=0.271,rank=2,andSHP(Y)=0.219,rank=1c)SHP(X)=18.84,rank=1,andSHP(Y)=23.04,rank=2d)SHP(X)=23.04,rank=2,andSHP(Y)=18.84,rank=1Answer:a)15WithregardtotheOIPa)Thecompositionoftheoptimalinternationalportfolioisidenticalforallinvestors,regardlessofhomecountry.b)Thecompositionoftheoptimalinternationalportfolioarevariesdependinguponthenumerairecurrencyusedtomeasurereturns.c)Thecompositionoftheoptimalinternationalportfolioisidenticalforallinvestors,regardlessofhomecountry,iftheyhedgetheirriskwithcurrencyfuturescontracts.d)Bothb)andc)Answer:b)EffectsofChangesintheExchangeRate16EmeraldEnergyisanoilexplorationandproductioncompanythattradesontheLondonstockmarket.Assumethatwhenpurchasedbyaninternationalinvestorthestock’spriceandtheexc