A+ Answers



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1. Base your answer to this question on contents of Exhibit 22.4 on page 821 of your textbook. Use the January 1991–December 1995 data only. Strictly on the basis of the correlation of returns, investments in which three countries would yield the greatest diversification?

A. Brazil, Hungary, Indonesia

B. Turkey, Korea, Chile

C. Turkey, India, Colombia

D. Turkey, Brazil, Malaysia

2. What special advantage do mutual funds confer for investing in emerging markets?

A. Emerging markets typically yield higher rates of returns for a given investment period

because risk is relatively high.

B. The correlation coefficients of returns between emerging and established markets are

generally negative.

C. 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.

D. Emerging market mutual funds provide diversification not available in global or

international funds.

3. Which of the following investments would certainly increase your risk exposure if most of

your portfolio is dominated by U.S. investments?

A. International investments characterized by a correlation with U.S. investments near zero

B. International investments with high historical rates of return and, therefore, to the right

side of the security market line

C. A mix of European and Pacific Basin stocks purchased through an international

mutual fund

D. International investments in countries where the exchange rate fluctuates excessively

4. 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.

A. If the manager were permitted to make the purchase, it would violate the fund’s

investment policy.

B. General Electric’s international exposure would enhance the fund’s diversification.

C. General Electric would add to the fund’s diversification, but the corporation’s large size

is contrary to the growth objective for the fund.

D. General Electric’s diverse operations are a favorable attribute, and the company’s

growth would enhance the fund’s growth objective.

5. If you wanted international diversification but wanted to decide which countries you would

invest in, which strategy would you use?

A. Invest through iShares country-specific exchange-traded funds.

B. Invest through a global mutual fund.

C. Invest through World Equity Benchmark shares.

D. Invest in euros.

6. Of the reasons listed below, which is the most important reason to invest internationally?

A. The overall return on international investments exceeds the return on most domestic

investments, thereby increasing total return.

B. International investments may be riskier than domestic investments, but their diversifying

effect can reduce the risk of the entire portfolio.

C. International investments reduce total portfolio risk because returns on international

investments typically have a lower standard deviation than domestic investments.

D. Although domestic investments offer some growth opportunities, the mature domestic

market lacks the number of growth opportunities in emerging economies.

7. 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

A. you hedged your investment with currency futures.

B. the value of the Euro dropped in relation to the Swiss franc.

C. political uncertainty in France resulted in a decline in your domestic stock market.

D. your domestic currency fell in relation to the Swiss franc.

8. Use Figure 22.4, on page 819, to answer the following question: How would you interpret

observations in the lower-left quadrant?

A. When one country’s return fell below –20 percent, the S&P 500 return was slightly

below zero.

B. After a year that the S&P 500 yielded a return slightly below zero, the EAFE lost more

than 20 percent.

C. Roughly every 20 years, you should expect a negative relationship between EAFE

returns and returns in the S&P 500.

D. Lines AB and CD are nearly equidistant from the observation, exemplifying how

diversification can benefit a portfolio.

9. The importance of market efficiency and its contribution to international investing is that

A. obtaining information on which to base foreign investment information may be difficult.

B. the rapid dissemination of new information and the intense competition among

investors produces efficient U.S. financial markets.

C. foreign firms with securities traded on U.S. exchanges meet SEC disclosure requirements.

D. inefficiencies in international markets may present opportunities for excess returns.

10. You might expect a domestic currency devaluation if

A. exports increase, resulting in a flood of foreign currency into the country.

B. significant domestic productivity declines decrease the attractiveness of domestic investments.

C. demand for domestic currency by foreign investors increases the supply of

domestic currency.

D. domestic equity market values rise on news of projected interest rate decreases.

11. The cash budget is critical to financial planning because it

A. enumerates receipts and disbursements necessary to project asset allocation.

B. aids the investor when deciding to purchase small cap stocks.

C. helps estimate social security payments.

D. is the best means for establishing one’s financial position.

12. Which of the following should be part of a balance sheet?

A. Bank deposits, salary, and royalties

B. IRA distributions, insurance, and maintenance

C. Pension, money market funds, and Keogh accounts

D. Certificates of deposit, cash value of life insurance, and real estate

13. Before investing, it’s essential that the investor first

A. determine his or her net worth.

B. thoroughly research and hire a professional planner.

C. construct a financial plan.

D. define his or her goal.

14. If a U.S. investor buys the stock of a corporation in Mexico, the investor will certainly sustain

a loss if the stock price

A. falls and the value of the peso rises.

B. rises and the value of the peso rises.

C. falls and the value of the peso falls.

D. rises and the value of the dollar rises.

15. When an investor buys an ETF, he or she

A. knows the return will be based on the movement of dollar cost of the currency purchased.

B. is sure of little fluctuation in the value of his or her currency.

C. physically holds the currency purchased.

D. counts on impure play of one currency’s value versus another’s.

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.

A. $216, 097.12 C. $132,195.27

B. $160,972.13 D. $108,049.16

17. The single most influential variable in determining investment returns is

A. heavy reliance upon index mutual funds.

B. selection of a fee-only investment advisor experienced in asset allocation.

C. selection of low-cost, high-performing mutual funds.

D. asset allocation decisions driven by investment policy.

18. 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?

A. Excessive turnover adds costs to the portfolio that put downward pressure on

asset values.

B. The investment policy may have assigned an over-weight to equity investments.

C. Some asset class values rise and fall faster than others, leading to an imbalance.

D. The portfolio performed much better than expected when targeted asset allocations

were established.

19. The real benefit of constructing a cash budget for investors is to

A. ensure that spending doesn’t exceed income.

B. identify sources of cash flow for investments.

C. aid balance sheet construction.

D. identify net cash flow for determination of net worth.

20. A pro forma financial statement identifies

A. what is owed and what is owned.

B. balance sheet and cash budget data.

C. one’s future or projected financial position.

D. what the investor’s present-day “estate” looks like.

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1. How would you explain that, although the efficient market hypothesis applies to the stock market, you can’t successfully invest by randomly selecting stocks?

6. What is the holding period return on an investment of $1,000 held for 10 months with $30

in dividends and a selling price of $1,250?

13. The rationale behind a moving average is that

14. Investors contribute to the efficiency of security markets by
B. applying technical analysis to their investment decisions.
C. combining cash flow analysis and ratio analysis to estimate stock value.
D. avoiding hot tips.

16. Which of the following statements is correct?
A. Security selection can be a complex process that’s aided by Internet financial

information services.

19. In fundamental analysis, the value added by industry analysis is particularly apparent

20. Which of the following reasons best explains why you would include inflation in a fundamental

analysis of stock values?
A. Inflation exerts broad influence on factors that underlie the economy.

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7. Duration is a better way to compare cash flows than simply comparing present values

because
A. duration incorporates cash flow volatility.

9. If you want to maximize safety and earn federally tax-exempt interest, you should buy
A. municipal bonds backed by the revenue earned on the project funded by the bond.

11. One strategy for diversifying government-issued bonds and earning tax-exempt interest is

to invest in

13. Why do bond issuers attach a call feature to their bonds?
D. Frees the organization from high-interest debt if interest rates drop

14. If you were CEO and decided to finance retirement of a bond issue, you would be most
likely to

19. Periods of a negatively sloped yield curve have also been times of

20. The impact of inflation as it relates to a bonding arrangement is most devastating to

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12. You know that leverage increases risk because

14. Suppose that you’re a corn farmer preparing to plant. You want to reduce the risk that corn

prices will drop below $2.20 per bushel next September when you harvest. What is the
beststrategy to reduce your risk?