Q&A Hero

Q: The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.75. The yield on a 1-year U.S. bill is 5%. A yield of __________ on a 1-year Canadian bill will make investor indifferent between investing in the U.S. bill and the Canadian bill. A. 9.2% B. 8.3% C. 6.4% D. 11.3% E. None of the options

Q: You are a U.S. investor who purchased British securities for 2,200 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 2,560 pounds and the pound is worth $1.60. A. 16.7% B. 20.3% C. 24.1% D. 41.4% E. None of the options

Q: Suppose the 1-year risk-free rate of return in the U.S. is 4.5% and the 1-year risk-free rate of return in Britain is 7.7%. The current exchange rate is 1 pound = U.S. $1.60. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security. A. 1.5525 B. 2.0411 C. 1.7500 D. 2.3369

Q: The interest rate on a 1-year Canadian security is 7.8%. The current exchange rate is C$ = US $0.79. The 1-year forward rate is C$ = US $0.77. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is A. 3.59%. B. 4.00%. C. 5.07%. D. 8.46%. E. None of the options

Q: Suppose the 1-year risk-free rate of return in the U.S. is 6%. The current exchange rate is 1 pound = U.S. $1.62. The 1-year forward rate is 1 pound = $1.53. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security? A. 15.44% B. 13.50% C. 12.24% D. 7.62% E. None of the options

Q: The yield on a 1-year bill in the U.K. is 7%, and the present exchange rate is 1 pound = U.S. $1.65. If you expect the exchange rate to be 1 pound = U.S. $1.45 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is A. 6.7%. B. 3.2%. C. 8%. D. 5.97%. E. None of the options

Q: Which equity index had the lowest volatility in terms of U.S. dollar-denominated returns for the period of five years ending in October 2016? A. Korea B. U.S. C. Toronto D. Nikkei

Q: Which equity index had the highest volatility in terms of U.S. dollar-denominated returns for the period of five years ending in October 2016? A. Shanghai B. India C. Nikkei D. U.S.

Q: The interplay between interest rate differentials and exchange rates, such that each adjusts until the foreign exchange market and the money market reach equilibrium, is called the A. Purchasing Power Parity Theory. B. Balance of Payments. C. Interest Rate Parity Theory. D. None of the options are correct.

Q: When Country A's currency strengthens against Country B's, citizens of Country A will A. pay less to buy Country B's products. B. pay more to buy Country B's products. C. pay more to buy domestically-produced products. D. not be affected by the change in their currency's value.

Q: As exchange rates change, they A. change the relative purchasing power between countries. B. can affect imports and exports between countries. C. will affect the flow of funds between countries. D. All of the options are true.

Q: The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called A. foreign exchange risk. B. political risk. C. translation exposure. D. hedging risk.

Q: Home bias refers to A. the tendency to vacation in your home country instead of traveling abroad. B. the tendency to believe that your home country is better than other countries. C. the tendency to give preferential treatment to people from your home country. D. the tendency to overweight investments in your home country. E. None of the options are correct.

Q: The EAFE is A. the East Asia Foreign Equity index. B. the Economic Advisor's Foreign Estimator index. C. the European and Asian Foreign Equity index. D. the European, Asian, French Equity index. E. the European, Australian, Far East index.

Q: WEBS portfolios A. are passively managed. B. are shares that can be sold by investors. C. are free from brokerage commissions. D. are passively managed and are shares that can be sold by investors. E. All of the options are correct.

Q: "ADRs" stands for ___________, and "WEBS" stands for ____________. A. additional dollar returns; weekly equity and bond survey B. additional daily returns; world equity and bond survey C. American dollar returns; world equity and bond statistics D. American depository receipts; world equity benchmark shares E. adjusted dollar returns; weighted equity benchmark shares

Q: When an investor adds international stocks to his or her U.S. stock portfolio, A. it will raise his or her risk relative to the risk he or she would face just holding U.S. stocks. B. he or she can reduce the risk of his or her portfolio. C. he or she will increase his or her expected return but must also take on more risk. D. it will have no impact on either the risk or the return of his or her portfolio. E. he or she needs to seek professional management because he or she doesn't have access to international investments on his or her own.

Q: Using the S&P 500 portfolio as a proxy of the market portfolio A. is appropriate because U.S. securities represent more than 60% of world equities. B. is appropriate because most U.S. investors are primarily interested in U.S. securities. C. is appropriate because most U.S. and non-U.S. investors are primarily interested in U.S. securities. D. is inappropriate because U.S. securities make up less than 41% of world equities. E. is inappropriate because the average U.S. investor has less than 20% of his or her portfolio in non-U.S. equities.

Q: The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's stock selection return contribution. A. 1.0% B. 1.0% C. 3.0% D. 0.25%

Q: The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's country selection return contribution. A. 12.5% B. 12.5% C. 11.25% D. 1.25% E. 1.25%

Q: The manager of Quantitative International Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: Calculate Quantitative's currency selection return contribution. A. +20% B. 5% C. +15% D. +5% E. 10%

Q: International investing A. cannot be measured against a passive benchmark, such as the S&P 500. B. can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East). C. can be measured against international indexes. D. can be measured against a widely-used index of non-U.S. stocks, the EAFE Index (Europe, Australia, Far East), and against international indexes. E. None of the options are correct.

Q: Exchange-rate risk A. results from changes in the exchange rates between the currency of the investor and the country in which the investment is made. B. can be hedged by using a forward or futures contract in foreign exchange. C. cannot be eliminated. D. results from changes in the exchange rates between the currency of the investor and the country in which the investment is made and cannot be eliminated.

Q: U.S. investors A. can trade derivative securities based on prices in foreign security markets. B. cannot trade foreign derivative securities. C can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K. and European stocks. can trade derivative securities based on prices in foreign security markets and can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K. and European stocks. E. None of the options are correct. U.S. investors can trade derivative securities based on prices in foreign security markets and can trade options and futures on the Nikkei stock index of 225 stocks traded on the Tokyo stock exchange and on FTSE (Financial Times Share Exchange) indexes of U.K. and European stocks. Gradable: automatic

Q: You are a U.S. investor who purchased British securities for 2,000 pounds, one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 2,400 pounds and the pound is worth $1.60. A. 16.7% B. 20.0% C. 28.0% D. 40.0% E. None of the options are correct.

Q: The major concern that has been raised with respect to the weighting of countries within the EAFE index is A. currency volatilities are not considered in the weighting. B. cross-correlations are not considered in the weighting. C. inflation is not represented in the weighting. D. the weights are not proportional to the asset bases of the respective countries. E. None of the options are correct.

Q: Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be A. 12.53%. B. 15.21%. C. 17.50%. D. 18.75%.

Q: Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be A. 12.0%. B. 12.5%. C. 13.0%. D. 15.5%.

Q: The present exchange rate is C$ = U.S. $0.78. The 1-year future rate is C$ = U.S. $0.76. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make an investor indifferent between investing in the U.S. bill and the Canadian bill. A. 2.4% B. 1.3% C. 6.4% D. 6.7% E. None of the options are correct.

Q: Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security. A. 1.6037 B. 2.0411 C. 1.7500 D. 2.3369

Q: The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is A. 3.59%. B. 4.00%. C. 5.23%. D. 8.46%. E. None of the options are correct.

Q: Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security? A. 2.44% B. 2.50% C. 7.00% D. 7.62% E. None of the options are correct.

Q: The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound = U.S. $1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is A. 6.7%. B. 0%. C. 8%. D. 1.25%. E. None of the options are correct.

Q: The straightforward generalization of the simple CAPM to international stocks is problematic because A. inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ. B. investors in different countries view exchange-rate risk from the perspective of different domestic currencies. C. taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio. D. All of the options are correct. E. None of the options are correct.

Q: In 2015, the U.S. equity market represented __________ of the world equity market. A. 19% B. 60% C. 43% D. 41%

Q: Using local currency returns, the S&P 500 has the highest correlation with A. Euronext. B. FTSE. C. Nikkei. D. Toronto.

Q: Which country has the largest stock market compared to GDP? A. Japan B. Germany C. Hong Kong D. U.S.

Q: Which country has the highest in GDP per capita? A. Luxembourg B. Canada C. Germany D. U.S.

Q: According to PRS, in 2015, which country had the highest composite risk rating on a scale of 0 (most risky) to 100 (least risky)? A. Switzerland B. Canada C. Germany D. U.S.

Q: The __________ index is a widely used index of non-U.S. stocks. A. CBOE B. Dow Jones C. EAFE D. All of the options are correct. E. None of the options are correct.

Q: Over the period 2011-2016, most correlations between the U.S. stock index and stock-index portfolios of other countries were A. negative. B. positive but less than .9. C. approximately zero. D. .9 or above. E. None of the options are correct.

Q: The performance of an internationally-diversified portfolio may be affected by A. country selection. B. currency selection. C. stock selection. D. All of the options are correct. E. None of the options are correct.

Q: __________ are mutual funds that invest in one country only. A. ADRs B. ECUs C. Single-country funds D. All of the options are correct. E. None of the options are correct.

Q: __________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions. A. Default risk B. Foreign exchange risk C. Market risk D. Political risk E. None of the options are correct.

Q: Shares of several foreign firms are traded in the U.S. markets in the form of A. ADRs. B. ECUs. C. single-country funds. D. All of the options are correct. E. None of the options are correct.

Q: Morningstar's RAR method I) is one of the most widely-used performance measures. II) indicates poor performance by placing up to 5 darts next to the fund's name. III) computes fund returns adjusted for loads. IV) computes fund returns adjusted for risk. V) produces ranking results that are the same as those produced with the Sharpe measure. A. I, II, and IV B. I, III, and IV C. I, IV, and V D. I, II, IV, and V E. I, II, III, IV, and V

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund. According to the Treynor measure, the performance of Buckeye Fund A. is better than the performance of Gator Fund. B. is the same as the performance of Gator Fund. C. is poorer than the performance of Gator Fund. D. cannot be measured as there are no data on the alpha of the portfolio. E. None of the options are correct.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund. According to the Treynor measure, the performance of Buckeye Fund A. is better than the performance of Gator Fund. B. is the same as the performance of Gator Fund. C. is poorer than the performance of Gator Fund. D. cannot be measured as there are no data on the alpha of the portfolio. E. None of the options are correct.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund. According to the Sharpe measure, the performance of Buckeye Fund A. is better than the performance of Gator Fund. B. is the same as the performance of Gator Fund. C. is poorer than the performance of Gator Fund. D. cannot be measured as there are no data on the alpha of the portfolio.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund. According to the Sharpe measure, the performance of Buckeye Fund A. is better than the performance of Gator Fund. B. is the same as the performance of Gator Fund. C. is poorer than the performance of Gator Fund. D. cannot be measured as there are no data on the alpha of the portfolio.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a lower beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund A. is better than the performance of Raider Fund. B. is the same as the performance of Raider Fund. C. is poorer than the performance of Raider Fund. D. cannot be measured as there are no data on the alpha of the portfolio.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund A. is better than the performance of Raider Fund. B. is the same as the performance of Raider Fund. C. is poorer than the performance of Raider Fund. D. cannot be measured as there are no data on the alpha of the portfolio.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Sharpe measure, the performance of Aggie Fund A. is better than the performance of Raider Fund. B. is the same as the performance of Raider Fund. C. is poorer than the performance of Raider Fund. D. cannot be measured as there are no data on the alpha of the portfolio.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A A. is better than the performance of portfolio B. B. is the same as the performance of portfolio B. C. is poorer than the performance of portfolio B. D. cannot be measured as there are no data on the alpha of the portfolio. E. None of the options are correct.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A A. is better than the performance of portfolio B. B. is the same as the performance of portfolio B. C. is poorer than the performance of portfolio B. D. cannot be measured as there are no data on the alpha of the portfolio. E. None of the options are correct.

Q: Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A A. is better than the performance of portfolio B. B. is the same as the performance of portfolio B. C. is poorer than the performance of portfolio B. D. cannot be measured as there are no data on the alpha of the portfolio. E. None of the options are correct.

Q: Most professionally managed equity funds generally A. outperform the S&P 500 Index on both raw and risk-adjusted return measures. B. underperform the S&P 500 Index on both raw and risk-adjusted return measures. C. outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on risk-adjusted return measures. D. underperform the S&P 500 Index on raw return measures and outperform the S&P 500 Index on risk-adjusted return measures. E. match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.

Q: Henriksson (1984) found that, on average, betas of funds __________ during market advances. A. increased very significantly B. increased slightly C. decreased slightly D. decreased very significantly E. did not change

Q: __________ developed a popular method for risk-adjusted performance evaluation of mutual funds. A. Eugene Fama B. Michael Jensen C. William Sharpe D. Jack Treynor E. Michael Jensen, William Sharpe, and Jack Treynor

Q: The comparison universe is not A. a concept found only in astronomy. B. the set of all mutual funds in the world. C. the set of all mutual funds in the U.S. D. a set of mutual funds with similar risk characteristics to your mutual fund. E. a concept found only in astronomy, the set of all mutual funds in the world, or the set of all mutual funds in the U.S.

Q: The comparison universe is A. a concept found only in astronomy. B. the set of all mutual funds in the world. C. the set of all mutual funds in the U.S. D. a set of mutual funds with similar risk characteristics to your mutual fund. E. None of the options are correct.

Q: Mutual funds show ____________ evidence of serial correlation, and hedge funds show ____________ evidence of serial correlation. A. almost no; almost no B. almost no; substantial C. substantial; substantial D. substantial; almost no E. modest; modest

Q: Hedge funds I) are appropriate as a sole investment vehicle for an investor. II) should only be added to an already well-diversified portfolio. III) pose performance-evaluation issues due to nonlinear factor exposures. IV) have down-market betas that are typically larger than up-market betas. V) have symmetrical betas. A. I only B. II and V C. I, III, and IV D. II, III, and IV E. I, III, and V

Q: To determine whether portfolio performance is statistically significant requires A. a very long observation period due to the high variance of stock returns. B. a short observation period due to the high variance of stock returns. C. a very long observation period due to the low variance of stock returns. D. a short observation period due to the low variance of stock returns. E. a low variance of returns over any observation period.

Q: The Modigliani M2 measure and the Treynor T2 measure A. are identical. B. are nearly identical and will rank portfolios the same way. C. are nearly identical, but might rank portfolios differently. D. are somewhat different; M2 can be used to rank portfolios, but T2 cannot. E. are somewhat different; T2 can be used to rank portfolios, but M2 cannot.

Q: Rodney holds a portfolio of risky assets that represents his entire risky investment. To evaluate the performance of Rodney's portfolio, in which order would you complete the steps listed? I) Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio. II) State your conclusions. III) Assume that past security performance is representative of expected performance. IV) Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy. A. I, III, IV, II B. III, IV, I, II C. IV, III, I, II D. III, II, I, IV E. III, I, IV, II

Q: The M2 measure was developed by A. Merton and Miller. B. Miller and Miller. C. Modigliani and Miller. D. Modigliani and Modigliani. E. the M&M Mars Company.

Q: The geometric average rate of return is based on A. the market's volatility. B. the concept of expected return. C. the standard deviation of returns. D. the CAPM. E. the principle of compounding.

Q: A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because A. portfolio returns may not be calculated in the same way. B. portfolio durations can vary across managers. C. if managers follow a particular style or subgroup, portfolios may not be comparable. D. portfolio durations can vary across managers and if managers follow a particular style or subgroup, portfolios may not be comparable. E. All of the options are correct.

Q: The dollar-weighted return on a portfolio is equivalent to A. the time-weighted return. B. the geometric average return. C. the arithmetic average return. D. the portfolio's internal rate of return. E. None of the options are correct.

Q: The M-squared measure considers A. only the return when evaluating mutual funds. B. the risk-adjusted return when evaluating mutual funds. C. only the total risk when evaluating mutual funds. D. only the market risk when evaluating mutual funds. E. None of the options are correct.

Q: The Jensen portfolio evaluation measure A. is a measure of return per unit of risk, as measured by standard deviation. B. is an absolute measure of return over and above that predicted by the CAPM. C. is a measure of return per unit of risk, as measured by beta. D. is a measure of return per unit of risk, as measured by standard deviation, and is an absolute measure of return over and above that predicted by the CAPM. E. is an absolute measure of return over and above that predicted by the CAPM, and is a measure of return per unit of risk, as measured by beta.

Q: The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM, A. therefore, it does not matter which measure is used to evaluate a portfolio manager. B. however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to . whether or not they are appropriate, depending on the investment scenario. C. therefore, all measure the same attributes. D. therefore, it does not matter which measure is used to evaluate a portfolio manager. However, the Sharpe and Treynor measures use different risk measures, so therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario. E. None of the options are correct.

Q: Risk-adjusted mutual fund performance measures have decreased in popularity because A. in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market. B. the measures usually result in negative performance results for the portfolio managers. C. the high rates of return earned by the mutual funds have made the measures useless. D. in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market, and the . measures usually result in negative performance results for the portfolio managers. E. None of the options are correct.

Q: The Value Line Index is an equally-weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of three stocks where the returns on the three stocks during a given period were 32%, 5%, and 10%, respectively, is A. 4.3%. B. 7.6%. C. 9.0%. D. 13.4%. E. 5.0%.

Q: A pension fund that begins with $500,000 earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $300,000. The dollar-weighted and time-weighted rates of return, respectively, were A. 11.7% and 12.5%. B. 12.1% and 12.5%. C. 12.5% and 11.7%. D. 12.5% and 12.1%.

Q: The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns. A. Sharpe measure B. Treynor measure C. Jensen measure D. information ratio E. None of the options are correct.

Q: In measuring the comparative performance of different fund managers, the preferred method of calculating rate of return is A. internal rate of return. B. arithmetic average. C. dollar weighted. D. time weighted. E. None of the options are correct.

Q: In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: The return on a bogey portfolio was 10%, calculated as follows: The contribution of selection within markets to total excess return was A. 1%. B. 3%. C. 4%. D. 5%.

Q: In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: The return on a bogey portfolio was 10%, calculated as follows: The contribution of asset allocation across markets to the total excess return was A. 1%. B. 3%. C. 4%. D. 5%.