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Exam 19: International Portfolio Diversification

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Question 31

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Solnik ["Why not diversify internationally?" Financial Analysts Journal, 1974] estimates that the systematic risk of a diversified portfolio of U.S. stocks can be reduced by about half by including international stocks in the portfolio.

A) True
B) False

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Question 32

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Empirical evidence suggests that stock return volatility varies predictably over time.

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B) False

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Question 33

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The risk of an individual asset when held in a portfolio with a large number of assets depends primarily on its return covariance with other assets in the portfolio and not on its return variance.

In an economist's perfect world with no barriers to the free flow of goods and capital, multinational corporations can create value for investors by diversifying internationally.

Solnik ["Why not diversify internationally?" Financial Analysts Journal, 1974] estimates that systematic risk comprises approximately 74% of individual security variance within a portfolio of U.S. stocks.

A stock in India rises 20% in local terms. Pound sterling rises 25% against the Indian rupee. What is the return in pound sterling?

The extent to which risk is reduced through portfolio diversification primarily depends on the covariance between individual assets in the portfolio.

The risk-reduction benefits of hedging the currency risk in an international investment portfolio are greatest for a portfolio of ______.

Dividend distributions are subject to withholding taxes in many countries.

Suppose both goods and financial markets are segmented across national borders but are otherwise efficient. Then, multinational corporations may be able to reduce their cost of capital through foreign direct investment.

In perfect markets, rational investors have equal access to information and to market prices.