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Exam 23: International Finance and Investments: Understanding Foreign Markets and Risks

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Question 1

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Discuss some of the accounting comparability problems involved in international investing.

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Some of the major accounting comparability problems in international investing are: (A)Depreciation.Canada allows firms to use different depreciation methods for financial reporting and tax purposes.The use of dual statements is uncommon in other countries. (B)Reserves.Canada standards generally allow lower discretionary reserves for possible losses,resulting in higher reported earnings than other countries. (C)Consolidation.Accounting practices in some countries do not call for all subsidiaries to be consolidated in the corporation's income statement. (D)Taxes.Taxes may be reported as either paid or accrued. (E)P/E ratios.There may different practices for calculating the number of shares used to calculate the P/E ratios.For example,firms may use end-of-year shares,year-average shares,or beginning-of-year shares.

Question 2

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According to Datastream,the __________ equity market had the highest average return in 2009 in U.S.dollars.

A) Canadian
B) Australian
C) Russian
D) Brazilian
E) none of these

F) A) and D)
G) B) and E)

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Question 3

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Suppose the 1-year risk-free rate of return in Canada is 4% and the 1-year risk-free rate of return in Britain is 7%.The current exchange rate is 1 pound = C $1.65.A 1-year future exchange rate of __________ for the pound would make a Canadian investor indifferent between investing in the Canadian security and investing the British security.

The performance of an internationally diversified portfolio may be affected by

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 _________.

Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.

The present exchange rate is C$= U.S.$1.05.The one year future rate is C$= U.S.$1.04.The yield on a 1-year U.S.bill is 3%.A yield of __________ on a 1-year __________ Canadian bill will make investor indifferent between investing in the U.S.bill and the Canadian bill.

Calculate Da Gama's currency selection return contribution.

Shares of several foreign firms are traded in the U.S.markets in the form of

"ADRs" stands for ___________ and "WEBS" stands for ___________.

Foreign index funds such as WEBS may be more useful as diversification tools than closed-end funds or ADRS because

You are a Canadian 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 Canadian dollars was __________ if the value of the securities is now 2,400 pounds and the pound is worth $1.60.

The yield on a 1-year bill in the U.K.is 1.5% and the present exchange rate is 1 pound = C $1.60.If you expect the exchange rate to be 1 pound-C $1.50 a year from now,the return a Canadian investor can expect to earn by investing in U.K.bills is

The __________ index is a widely used index of non-U.S.stocks.

In 1998,the largest proportion of market capitalization in the EAFE index was represented by ___________;by 2007 this country's proportion had __________:

Home bias refers to

Of developed countries,the __________ equity market had the highest beta with the U.S.index between 1999 and 2008.

__________ refers to the possibility of expropriation of assets,changes in tax policy,and the possibility of restrictions on foreign exchange transactions.

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 _________.

In 2007,the Canadian equity market represented __________ of the world equity market.