Multiple Choice Answers

1.         Which of the following investments would certainly increase your risk exposure if most of
your portfolio is dominated by U.S. investments?
International investments characterized by a correlation with U.S. investments near zero
International investments with high historical rates of return and, therefore, to the right
side of the security market line
A mix of European and Pacific Basin stocks purchased through an international
mutual fund
International investments in countries where the exchange rate fluctuates excessively
2.         A pro forma financial statement identifies what?
what is owed and what is owned.
balance sheet and cash budget data.
one’s future or projected financial position.
what the investor’s present-day “estate” looks like.
3.         If you were supervisor of a mutual fund investment manager working for an international
growth fund, how would you interpret the following situation? The manager recommends
purchase of stock in General Electric, a New York–based corporation. Her rationale for the
purchase is based on the fact that General Electric’s operations and revenue are truly international, with a substantial proportion of operations and revenue from over a dozen countries.
If the manager were permitted to make the purchase, it would violate the fund’s
investment policy.
General Electric’s international exposure would enhance the fund’s diversification.
General Electric would add to the fund’s diversification, but the corporation’s large size is contrary to the growth objective for the fund.
General Electric’s diverse operations are a favorable attribute, and the company’s
growth would enhance the fund’s growth objective.
4.         If you wanted international diversification but wanted to decide which countries you would
invest in, which strategy would you use?
Invest through iShares country-specific exchange-traded funds.
Invest through a global mutual fund.
Invest through World Equity Benchmark shares.
Invest in euros.
5.         When an investor buys an ETF, he or she
knows the return will be based on the movement of dollar cost of the currency purchased.
is sure of little fluctuation in the value of his or her currency.
physically holds the currency purchased.
counts on impure play of one currency’s value versus another’s.
6.         If you lived in a nation that didn’t use the Swiss currency for exchange and were invested
in securities issued by the government of Switzerland, you might expect the value of your
investment to rise if
the value of the Euro dropped in relation to the Swiss franc.
you hedged your investment with currency futures.
political uncertainty in France resulted in a decline in your domestic stock market.
your domestic currency fell in relation to the Swiss franc.
7.         Of the reasons listed below, which is the most important reason to invest internationally?
The overall return on international investments exceeds the return on most domestic
investments, thereby increasing total return.
International investments reduce total portfolio risk because returns on international
investments typically have a lower standard deviation than domestic investments.
International investments may be riskier than domestic investments, but their diversifying effect can reduce the risk of the entire portfolio.
Although domestic investments offer some growth opportunities, the mature domestic
market lacks the number of growth opportunities in emerging economies.
8.         What special advantage do mutual funds confer for investing in emerging markets?
Emerging markets typically yield higher rates of returns for a given investment period
because risk is relatively high.
Emerging funds allow investors to invest in specific markets even though they aren’t familiar with corporations, laws, and particulars of investing in those markets.
The correlation coefficients of returns between emerging and established markets are
generally negative
Emerging market mutual funds provide diversification not available in global or
international funds.
9.         The importance of market efficiency and its contribution to international investing is that
obtaining information on which to base foreign investment information may be difficult.
the rapid dissemination of new information and the intense competition among
investors produces efficient U.S. financial markets.
foreign firms with securities traded on U.S. exchanges meet SEC disclosure requirements.
inefficiencies in international markets may present opportunities for excess returns.
10.       You might expect a domestic currency devaluation if
exports increase, resulting in a flood of foreign currency into the country.
significant domestic productivity declines decrease the attractiveness of
domestic investments.
demand for domestic currency by foreign investors increases the supply of
domestic currency.
domestic equity market values rise on news of projected interest rate decreases.
11.       The cash budget is critical to financial planning because it
enumerates receipts and disbursements necessary to project asset allocation.
helps estimate social security payments.
is the best means for establishing one’s financial position.
aids the investor when deciding to purchase small cap stocks.
12.       Before investing, it’s essential that the investor first
determine his or her net worth.
construct a financial plan.
thoroughly research and hire a professional planner.
define his or her goal.
13.       If a U.S. investor buys the stock of a corporation in Mexico, the investor will certainly sustain a loss if the stock price
falls and the value of the peso rises.
falls and the value of the peso falls.
rises and the value of the peso rises.
rises and the value of the dollar rises.
14.       The real benefit of constructing a cash budget for investors is to
ensure that spending doesn’t exceed income.
aid balance sheet construction.
identify sources of cash flow for investments
identify net cash flow for determination of net worth.
15.       The single most influential variable in determining investment returns is
heavy reliance upon index mutual funds.
selection of a fee-only investment advisor experienced in asset allocation.
selection of low-cost, high-performing mutual funds.
asset allocation decisions driven by investment policy.
16.       A 30-year-old with a portfolio of $50,000 with projected earnings of five percent per year
can expect the portfolio to be worth at age 60.
$216, 097.12
17. What is the most likely explanation for discrepancies between targeted asset allocations
and current asset allocations if the portfolio’s allocations matched the target one year ago
and no money was added to or subtracted from the portfolio?
Excessive turnover adds costs to the portfolio that put downward pressure on
asset values.
The investment policy may have assigned an over-weight to equity investments.
Some asset class values rise and fall faster than others, leading to an imbalance.
The portfolio performed much better than expected when targeted asset allocations
were established.