Chapter 19: International Diversification

Covered interest parity fulfills the no arbitrage condition because

all rates and prices are known at the outset.

International investing adds which component to performance attribution calculations?

currency selection

True or false: Due to the risky nature of some international investments, internationally diversifying a portfolio almost always causes the average standard deviation of the portfolio to increase.

false

True or false: In 2016, both China and Venezuela were in the top 50 least risky countries.

false

True or false: Investors should always hedge exchange rate risk, due to its size and significance in global portfolio returns.

false

True or false: Past realized returns are more useful estimates of expected returns than past risk measures are useful estimates of future risk.

false

True or false: The United States has the lowest risk rating in the International Country Risk Guide.

false

The most common method of weighting an international index like the EAFE is by

market capitalization

Political risk as applied to international investing decisions includes:

potential expropriation of assets restrictions on exchange of currencies changes in a country's business climate changes in tax policy

True or false: Relative to their Gross Domestic Product, emerging markets are underrepresented in global market capitalization.

true

True or false: The market capitalization of emerging stock markets represents around 21% of the total world market capitalization in 2017.

true

If an active manager believes the U.S. dollar is overvalued compared to the Japanese currency, then he should increase his exposure to

yen

The current exchange rate on the pound is $1.60. You can invest in a risk-free British government instrument that will pay a 5% rate of return in pounds. You want to invest $500,000. To exactly hedge the exchange rate risk in this investment, you will use a forward (or futures) contract for delivery of pounds of what size?

328,125 pounds (500000/1.60=312500*1.05=328,125)

Identify reasons for the diminishing benefits of diversification in the past decades.

Correlations with the U.S. market have risen over time Correlations rise in times of market disruption

Economic risk as applied to international investing decisions includes:

GDP per capital Annual Inflation Rate Budget balance

The largest contributor to EAFE by Market Capitalization in 2018 was

Japan

Which attribution selection categories are appropriate for use in an international equity fund performance evaluation?

Stock selection Currency selection Country selection

The correlation between country performance, over time, is

increasing