Essentials of Investment 9ed Chaps 18-19

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1、CHAPTER19GLOBALIZATIONANDINTERNATIONALINVESTING1.False.Investmentsmadeinalocalcurrencyhavetheaddedriskassociatedwithexchangerates.Ifaninvestmentweremadeindollars,thebusinessriskofthefirmwouldbetheonlyriskbornebytheinvestor.Iftheinvestmentismadeinthelocalcurrency,theinvestortakesonbothbusines

2、sriskandexchangeraterisk.2.False.Inalmostallcasesthestatementistrue,however,suchdiversificationbenefitisnotassured.InthosecaseswherethereisnocorrelationcoefficientbetweentheinternationalinvestmentandtheU.S.portfolio,adiversificationgaincannotbeassured.Infact,shouldahighstandarddeviationsecur

3、itywithzerooronecorrelationwiththeU.S.portfoliobeadded,theoverallstandarddeviationoftheportfoliowouldincrease.3.False.Evidenceshowsthattheminimum-varianceportfolioisnottheefficientchoice.Acapitalization-weightedportfolioofworldindexesislikelytoproduceabetterrisk-returntrade-offthantheminimum

4、-varianceportfolio.4.True.Byhedging,itispossibletovirtuallyeliminateexchangeraterisk.Theresultisasetofreturnsbasedontheforeignstocksandnotthecurrencyfluctuations.5.a.$10,000/$2=£5,000£5,000/£40=125sharesTheinvestorcanbuy125shares.b.Tofillinthetable,weusetherelation:1+r(US)=[(1+rf(UK)]E1/E0Do

5、llar-DenominatedReturn(%)PriceperPound-DenominatedforYear-EndExchangeRateShare(£)Return(%)$1.80/£$2.00/£$2.20/££35–12.5%–21.25%–12.5%–3.75%£400.0%–10.00%0.0%10.00%£4512.5%1.25%12.5%23.75%c.Thedollar-denominatedreturnequalsthepound-denominatedreturnwhentheexchangerateatyear-endequalstheexchan

6、gerateatinitialinvestment.6.Thestandarddeviationofthepound-denominatedreturn(using3degreesoffreedom)is10.21%.Thedollar-denominatedreturnhasastandarddeviationof13.10%(using9degreesoffreedom),greaterthanthepound-denominatedstandarddeviation.Thisisduetotheadditionofexchangeraterisk.1CFA2a.Thepr

7、imaryrationaleistheopportunityfordiversification.Factorsthatcontributetolowcorrelationsofstockreturnsacrossnationalboundariesare:i.imperfectcorrelationofbusinesscyclesii.imperfectcorrelationofinterestratesiii.imperfectcorrelationofinflationratesiv.