tb20

KirtC.Butler,MultinationalFinance,3rdedition160PARTVIInternationalPortfolioInvestmentandAssetPricingChapter20InternationalPortfolioDiversificationTrue/False1.Inperfectmarkets,rationalinvestorshaveequalaccesstoinformationandtomarketprices.ANS:True.2.Allocationalefficiencyreferstowhetherownershipinastate-ownedfirmisdistributedequallyamongthecitizenswhenthefirmisprivatized.ANS:False.Allocationallyefficientmarketsoptimallyallocatecapitaltoproductiveinvestments.3.Theextenttowhichriskisreducedthroughportfoliodiversificationprimarilydependsonthecovariancebetweenindividualassetsintheportfolio.ANS:True.4.Theextenttowhichriskisreducedthroughportfoliodiversificationprimarilydependsontheexpectedreturnsandvariancesofreturnintheportfolio.ANS:False.Itdependsprimarilyuponthecovariances(orcorrelations).5.Asthenumberofassetsheldinaportfolioincreases,thevarianceofreturnontheportfoliobecomesmoredependentonthecovariancesbetweentheindividualassetsandlessdependentonthevariancesoftheindividualassets.ANS:True.6.Theriskofanindividualassetwhenheldinaportfoliowithalargenumberofassetsdependsprimarilyonitsreturncovariancewithotherassetsintheportfolioandnotonitsreturnvariance.ANS:True.7.TheSharpeindexisusefulformeasuringtherisk-adjustedperformanceofasingleassetinawell-diversifiedportfolio.ANS:False.TheSharpeindexisbestformeasuringtheperformanceofaportfolio.8.Totalriskequalssystematicriskplusunsystematicriskpluserror.ANS:False.Unsystematicriskincludesanyrandomnoiseorerror.9.Aforeignstockgoesup10%inpriceintheforeigncurrencyasthedomesticcurrencydepreciatesby10%.Thepriceoftheforeignstockindomesticcurrencystaysthesame.ANS:False.Itincreasesinvalueby(1.10)(1.10)-1=0.21,or21%.10.Financialcontractsinhigh-inflationcountriesareseldompeggedtoinflationbecausetheirvaluewouldbeerodedatarapidrate.ANS:False.Theirvaluewouldbeerodediftheywerenotpegged.11.Thevarianceofforeignstockreturnstodomesticresidentsisprimarilyduetovarianceinforeignmarketreturnsandtoalesserextenttovarianceinexchangerates.ANS:True.KirtC.Butler,MultinationalFinance,3rdedition16112.Thevarianceofforeignbondreturnstodomesticresidentsisprimarilyduetoreturnvarianceinforeignmarketreturnsandtoalesserextenttovarianceinexchangerates.ANS:False.Itisdueprimarilytoexchangeratevariability.13.Solnik[“Whynotdiversifyinternationally?”FinancialAnalystsJournal,1974]estimatesthatsystematicriskcomprisesapproximately74%ofindividualsecurityvariancewithinaportfolioofU.S.stocks.ANS:False.Unsystematicriskcomprises74%oftotalriskinadiversifiedU.S.portfolio.14.Solnik[“Whynotdiversifyinternationally?”FinancialAnalystsJournal,1974]estimatesthatthesystematicriskofadiversifiedportfolioofU.S.stockscanbereducedbyabouthalfbyincludinginternationalstocksintheportfolio.ANS:True.15.Dividenddistributionsaresubjecttowithholdingtaxesinmostcountries.ANS:True.16.AmericandepositoryreceiptspaydividendsindollarsandtradeonU.S.exchangesjustlikeotherdomesticU.S.shares.ANS:True.17.AmericansharespaydividendsindollarsandtradeonU.S.exchangesjustlikeotherdomesticU.S.shares.ANS:False.Theyaredenominatedintheforeigncurrency.18.Open-endmutualfundsoftentradeatlargepremiumsordiscountstonetassetvalue.ANS:False.Theytradeclosetonetassetvalue.19.Anationalsecuritiesmarketcanbeinformationallyefficientinadomesticcontextandyetsegmentedinaninternationalcontext.ANS:True.20.Supposebothgoodsandfinancialmarketsaresegmentedacrossnationalbordersbutareotherwiseefficient.Then,multinationalcorporationsmaybeabletoreducetheircostofcapitalthroughforeigndirectinvestment.ANS:True.21.Theextenttowhichriskisreducedbyportfoliodiversificationdoesnotdependonthecorrelationsbetweenassetsintheportfolio.ANS:False.Itdependsverymuchuponthecorrelations.22.Returnvarianceonaportfoliowithmanyassetsdependsmoreonthevariancesoftheindividualassetsintheportfoliothanonthecovariancesbetweentheindividualassets.ANS:False.Itismoredependentonthecovariances.23.Thecorrelationbetweenreturnsoncompaniesinthesameindustryanddomiciledinthesamecountryisusuallygreaterthanthecorrelationbetweenreturnsoncompaniesinthesameindustrybutindifferentcountries.ANS:True.KirtC.Butler,MultinationalFinance,3rdedition16224.Inaneconomist’sperfectworldwithnobarrierstothefreeflowofgoodsandcapital,multinationalcorporationscancreatevalueforinvestorsbydiversifyinginternationally.ANS:False.Novalueiscreatedbecauseinvestorsareabletodiversifytheirownportfolios.MultipleChoice1.Theperfectmarketassumptionsincludeeachofthefollowingexcept____.a.equalaccesstoregisteredbrokersb.equalaccesstomarketpricesc.frictionlessmarketsd.nocostsoffinancialdistresse.rationalinvestorsANS:A2.Frictionlessfinancialmarketscouldhavewhichofthefollowing?a.agencycostsb.bid-askspreadsc.brokeragefeesd.governmentinterventione.irrationalinvestorsANS:E3.Whichofthefollowingconditionsissufficienttoensureanoperationallyefficientmarket?a.frictionlessmarketsb.perfectcompetitionc.rationalinvestorsd.morethanoneoftheabovee.noneoftheaboveANS:A4.Thebenefitsofinternationaldiversificationarelimitedbythelackof____inforeignmarkets.a.adequateinformationb.freeconvertibilityofcurren