CH 11 Multiple Choice Change in the value of future cash flows due to unexpected changes in exchange rates is called to currency risk a economic exposure b operating exposure c transaction exposure d translation exposure e none of the above Change in financial accounting statements arising from unexpected changes in currency values is called to currency risk a economic exposure b operating exposure c transaction exposure d translation exposure e none of the above Change in the value of contractual cash flows due to unexpected changes in currency values is called to currency risk a economic exposure b operating exposure c transaction exposure d translation exposure e none of the above Change in the value of noncontractual cash flows due to unexpected changes in currency values is called to currency risk a economic exposure b operating exposure c transaction exposure d translation exposure e none of the above Operating cash flows that are exposed to currency risk are affected primarily by a changes in domestic inflation b changes in foreign inflation c changes in nominal exchange rates d changes in real exchange rates e none of the above Monetary cash flows that are exposed to currency risk are affected primarily by a changes in domestic unemployment b changes in foreign unemployment c changes in nominal exchange rates d changes in real exchange rates e none of the above When goods markets are segmented from other markets, goods prices are determined a in foreign markets b in the global market c in the local market d all of the above e none of the above The classic exporter has a both revenues and expenses that are determined globally b both revenues and expenses that are determined locally c revenues that are determined locally and expenses that are determined globally d revenues that are determined globally and expenses that are determined locally e none of the above The classic importer has a both revenues and expenses that are determined globally b both revenues and expenses that are determined locally c revenues that are determined locally and expenses that are determined globally d revenues that are determined globally and expenses that are determined locally e none of the above 10 The globally competitive multinational corporation typically has a both revenues and expenses that are determined globally b both revenues and expenses that are determined locally c revenues that determined locally and expenses that are determined globally d revenues that determined globally and expenses that are determined locally e none of the above 11 The is positively exposed to the real value of the domestic currency a classic exporter b classic importer c typical domestic firm d globally competitive firm e none of the above 12 The is negatively exposed to the real value of the domestic currency a classic exporter b classic importer c typical domestic firm d globally competitive firm e none of the above 13 Price elasticity of demand is defined as minus the percentage change in a interest rates for a given change in money supply b money supply for a given change in interest rates c price for a given percentage change in quantity demanded d quantity demanded for a given percentage change in price e none of the above 14 Exposure to currency risk a can be thought of as a regression coefficient b cannot be measured by conventional methods c is equal to the price elasticity of demand d is equal to the variability of currency values e is equal for all companies 15 Operating exposure to currency risk is most effectively managed by a hedging with currency forwards or futures b hedging with currency options c hedging with real assets d hedging with virtual assets e none of the above 16 A disadvantage of real asset hedges is that a bid-ask spreads can be large b daily marking to market can cause cash flow mismatches c option premiums can be large d they come in only a limited number of currencies and maturities e they involve substantial sunk costs 17 are relatively insensitive to currency fluctuations a Domestic firms b Exporters c Importers d Inbred corporations e Multinational corporations 18 Exposure to currency risk is measured as the percentage change in a currency values given a percentage change in exchange rates b exchange rates given a percentage change in currency values c exchange rates given a percentage change in value d value given a percentage change in exchange rates e None of the above 19 The domestic currency value of a monetary cash flow denominated in a foreign currency changes with a change in the value of the foreign currency a disproportionately b the currency of denomination c not at all d one for one e none of the above 20 The domestic currency value of an expected future operating cash flow denominated in a foreign currency changes with a change in the value of the foreign currency a disproportionately b the currency of denomination c not at all d one for one e none of the above 21 Shareholders exposure to currency risk is equal to a assets less liabilities b credits less debits c net monetary assets plus real assets d the sum of transaction exposure and operating exposure e none of the above 22 An exporter’s financial market hedging alternatives include each of a) through c) except a Buy the foreign currency with long-dated forward contracts b Use currency swaps to acquire financial liabilities in the foreign currency c Use a rolling hedge to repeatedly sell the foreign currency d More than one of the above e None of the above 23 An importer’s financial market hedging alternatives include each of a) through d) except a Buy the foreign currency with long-dated forward contracts b Invest in long-dated foreign bonds c Use currency swaps to acquire financial assets in the foreign currency d Use a rolling hedge to repeatedly sell the foreign currency e none of the above 24 Managers should assess the performance of financial market hedges of operating exposures by a assessing the interaction of operating performance with exchange rate changes b varying pro forma operating performance within reasonable limits c varying the exchange rate and assessing the resulting competitive position of the firm d more than one of the above e none of the above 25 Operational hedges can create value by a reducing agency costs b reducing expected taxes c reducing costs of financial distress d more than one of the above e none of the above 26 The main advantage of a financial market hedge of operating exposure to currency risk is that a financial market hedges can completely cancel operating exposures to currency risk b financial market transactions are zero-NPV transactions c the costs of buying or selling financial instruments are low compared to the costs of investing or disinvesting in real assets d the uncertain cash flows of operating exposures to currency risk are exactly offset by the uncertain outcomes of a financial market hedge e none of the above 27 Dimensions of diversification that can reduce variability in the multinational corporation’s operating cash flows include a currency and geographic diversification b currency and product market diversification c geographic and product market diversification d currency and virtual diversification e none of the above 28 Multinational corporations have an advantage over domestic firms in their a market selection and promotion strategies b plant location decisions c product sourcing decisions d more than one of the above e none of the above 29 A Dutch exporter with dollar revenues and euro expenses has a foothold in the U.S market The company’s competitors are domestic U.S firms that have revenues and expenses denominated in dollars Sensible pricing strategies that the Dutch exporter can pursue in response to an appreciation of the dollar include which of a) through c)? a Maintain the current euro price for their goods, try to sell the same quantity in the U.S market, and capture a bigger contribution margin per unit b Maintain the current dollar price for their goods and try to increase profits by increasing sales volume at the current contribution margin c Follow the lead of the price leader in the U.S market d more than one of the above e none of the above 30 The percent of the variation in asset value that is explained by variation in a currency value is called the a beta b price elasticity of demand c r-square d slope coefficient e none of the above CH 12 Multiple Choice Translation accounting methods include each of a) through d) except the method a current/noncurrent b temporal c monetary/nonmonetary d current rate e all of the above are translation accounting methods The temporal method of FAS #8 identifies each of a) through c) except a assets and liabilities are translated at historical exchange rates b depreciation and cost of goods sold are translated at historical exchange rates c income statement items are translated at an average exchange rate over the period d all of the above are elements of FAS #8 e none of the above are elements of FAS #8 Net exposed assets equal a assets less liabilities b exposed assets less exposed liabilities c shareholders’ equity d more than one of the above e none of the above FAS #52 specifies each of the following rules except a all assets and liabilities (including common equity) are translated at the current exchange rate b dividends paid are translated at the current exchange rate c income statement items are translated at an exchange rate (or an exchange rate average) from the reporting period d all of the above are elements of FAS #52 e none of the above are elements of FAS #52 To maximize shareholder wealth, managers should only hedge translation exposure if it a affects the total risk of the firm b involves accounting profits c involves cash flows d is convenient e none of the above FAS #8 assumes that the value of the firm’s real assets are to currency risk FAS #52 assumes that the value of the firm’s real assets are to currency risk a fully exposed partially exposed b fully exposed unexposed c partially exposed fully exposed d partially exposed unexposed e unexposed fully exposed Accountants and financial managers prefer FAS #52 to FAS #8 because FAS #52 a allows balance sheet gains or losses to be isolated from reported income b correctly values current assets and liabilities c values real assets at historical rates that more reliably reflect asset value d more than one of the above e none of the above The relation of stock returns to earnings surprises around the time of corporate earnings announcements is measured with a a beta coefficient b an earnings response coefficient c the price elasticity of demand d the sensitivity of share price to exchange rates e none of the above Information-based reasons for hedging translation exposure include each of the following except a b c d e The quality of accounting information can be improved Meeting profit forecasts retains management’s credibility in the marketplace Information costs can be reduced in a perfect market Credit ratings are tied to accounting performance rather than cash flow Loan covenants are tied to accounting income 10 In the United States, FAS #133 “Accounting for Derivative Instruments and Hedging Activities” requires each of a) through d) except a Derivatives are assets and liabilities that should be reported in financial statements b Market value is the most relevant measure of value c Only assets and liabilities should be reported as such Income and expenses should be reported on the income statement d Hedge transactions should be fully capitalized on the balance sheet e FAS #133 requires all of the above 11 In the United States, FAS #133 “Accounting for Derivative Instruments and Hedging Activities” values financial derivatives at a book value b historical cost c historical exchange rates d market e none of the above 12 Which of the following is a reasonable guideline for currency risk management a All noncash currency risk exposures should be hedged with currency derivatives b Do not hedge unless the purpose is to reduce translation exposure to currency risk c Treasury should hold the managers of individual operating units responsible for the consequences of unexpected changes in currency values d Treasury should quote market prices for currency hedges to the individual units e None of the above 13 Adverse selection costs arise from a differential taxes b information asymmetries c large bid-ask spreads d the perfect market assumptions e none of the above 14 Bodnar, Hayt, and Marston’s “1998 Wharton Survey of Financial Risk Management by U.S Non-Financial Firms” in Financial Management found that financial officers’ biggest concern regarding derivatives was a accounting treatment b c d e credit risk reaction by analysts or investors SEC disclosure requirements secondary market liquidity 15 According to studies cited in the text, increased disclosure about financial price risks and risk management activities results in each of the following except a higher trading volumes b increased risks of litigation over accounting disclosure practices c increased share price sensitivity to underlying financial prices d lower trading volume sensitivity to changes in underlying financial prices e lower bid-ask spreads CH 13 Multiple Choice a b c d e According to the text, sources of country risk include expropriation risk and default risk expropriation risk and other political risks financial risk and socioeconomic risk political risk and financial risk political risk and socioeconomic risk Political risks arise because of a b c d investment agreements between MNCs and host governments the methods used to identify particular political risks unexpected events in a country’s financial, economic, or business life unexpected changes in the political environment within a host country or in the relationship of a host country to another country e none of the above a b c d e Country risk can affect the value of a multinational corporation through changes in future cash flows changes in investors’ required return on investment changes in managers’ actions more than one of the above none of the above a b c d e a b c d e produce country risk ratings that are positively correlated with each other produce country risk ratings that are negatively correlated with each other produce country risk ratings that are uncorrelated with each other seldom provide assessments of micro risks use Morgan Stanley Dean Witter’s rating system to produce their ratings Examples of macro country risks include each of the following except unexpected changes in a host country’s tax rates unexpected changes in a host country’s fiscal policies unexpected changes in a host country’s monetary policies unexpected changes in a host country’s bankruptcy or ownership laws unexpected changes in a host country’s regulations on the use of migrant workers Political risk includes each of the following except a expropriation b potential loss of intellectual property rights c protectionism d risks arising from dealing with an unfamiliar culture e the risk of disruptions in operations a b c d e a b c d e Companies that rate country risk Political risk is greatest in monarchies in democracies as a result of armed conflict when there is a marginal (or fractional) change in government when an incumbent political party imposes its agenda on foreign-based MNCs Blocked funds are a drain on project value when a project suffers early losses they are blocked in the host economy they are generated by real assets they cannot be immediately repatriated to the parent corporation they cannot earn their required return in the host country Intellectual property rights include each of the following except a copyrights b monopoly access to a market c patents d proprietary technologies e secret formulas 18 A U.S.-based corporation has £8,000 in total foreign tax credits (FTC) on a consolidated basis The firm’s overall FTC limitation is £5,000 What is the firm’s U.S tax liability or excess FTC? a £0 b £3,000 c £5,000 d £8,000 e the firm has £3,000 in excess FTCs that can be carried back or forward 19 If a U.S parent corporation owns more than 50% of a foreign corporation either in terms of market value or voting power, the foreign subsidiary is called a a controlled foreign corporation b foreign affiliate c foreign sales branch d wholly-owned subsidiary e none of the above 20 The intent of the foreign tax credit is to a avoid double taxation of foreign-source income b ensure national sovereignty c ensure that foreign multinationals pay their fair share of the tax burden d pay for social programs e none of the above 21 The overall FTC limitation applies to a consolidated foreign-source income b consolidated global income c domestic as well as foreign corporations d passive investment income e none of the above 22 The usefulness of U.S foreign tax credits (FTCs) is limited by each of a) through d) except a the allocation of income rules b income baskets c the overall FTC limitation d Subpart F income e all of the above limit the usefulness of foreign tax credits 23 Active income includes each of the following except a dividends received from active subsidiaries b dividends received from less-than-10% owned companies c income from active foreign branches d interest received from more-than-50% owned subsidiaries e management fees received from active subsidiaries 24 Reinvoicing centers should be located in countries with each of the following except a access to Eurocurrency markets b low explicit taxes c low implicit taxes d sound physical and legal infrastructure e a volatile currency 25 Korea imposes a 34% tax on corporate income Turkey imposes a 46% tax rate Pretax returns in Korea are 15% If the law of one price holds, pretax returns in Turkey are a 12.27% b 15.67% c 18.33% d 22.98% e 26.56% 26 Pretax returns in Singapore are 18% Pretax returns on comparable assets in Spain are 20.215% Singapore’s tax rate is 27% In equilibrium, Spain’s tax rate must be a 20% b 25% c 30% d 35% e 40% 27 Active management of transfer prices is likely to be the most advantageous when a assets are tangible rather than intangible b gross operating margins are low c intermediate products have no market price d operations are in a single tax jurisdiction e transactions are between unrelated parties 28 Foreign operations are more likely to be set up as a foreign branch when a bribes are a common business practice in the foreign country b disclosure requirements in the foreign country are high c earnings are expected to be negative in the early years of operations d the potential for litigation over foreign operations is high e none of the above 29 Relative to local (foreign) competition, foreign-source income is most valuable to a U.S.based firm when a the income is from a low-tax country and the firm has excess foreign tax credits b the income is from a high-tax country and the firm has excess foreign tax credits c the income is from a low-tax country and the firm has no excess foreign tax credits d the income is from a high-tax country and the firm has no excess foreign tax credits e none of the above 30 Relative to local (foreign) competition, foreign-source income is least valuable to a U.S.based firm when a the income is from a low-tax country and the firm has excess foreign tax credits b the income is from a high-tax country and the firm has excess foreign tax credits c the income is from a low-tax country and the firm has no excess foreign tax credits d the income is from a high-tax country and the firm has no excess foreign tax credits e none of the above CH 17 Multiple Choice An option with more than one source of uncertainty is called a(n) option a amorphous b complex c compound d rainbow e switching Managerial divergence from the NPV decision rule “accept all positive NPV projects” arises because a managers’ objectives can differ from those of shareholders b of the presence of real options c the NPV decision rule is not designed to maximize shareholder wealth d three of the above e two of the above Managerial actions can appear to be inconsistent with the NPV rule because a managers are irrational b markets are inefficient c options on real assets are difficult to value with NPV d three of the above e two of the above Real options include a the expansion/contraction options b the investment/abandonment options c the suspension/reactivation options d three of the above e two of the above The time value of an option to invest in a real asset reflects a managerial flexibility in the timing of investment b the value of the asset as a “now or never” proposition c the value of the option to delay the project d three of the above e two of the above The intrinsic value of an option to invest in a real asset reflects a managerial flexibility in the timing of investment b the value of the asset as a “now or never” proposition c the value of the option to delay investment d three of the above e two of the above The value of an option to invest in a real asset reflects a managerial flexibility in the timing of investment b the value of the asset as a “now or never” proposition c the value of the option to delay investment d three of the above e two of the above Firms continue to operate in unfavorable environments a because the time value of the abandonment option is zero b to avoid the sunk costs of abandoning investment c when there is a chance that prospects will improve d three of the above e two of the above Which of the following statements applies to hysteresis? a Hysteresis occurs when there are both high entry and exit costs b Hysteresis refers to the hysteria of a currency crisis c Hysteresis is a consequence of the intrinsic value of a “now or never” proposition d Three of the above e Two of the above 10 Call option values increase with a an increase in the exercise price b an increase in the volatility of the underlying asset value c an increase in the systematic risk (beta) of the asset underlying the option d more than one of the above e none of the above 11 Call option values decrease with a an increase in the underlying asset value b an increase in the volatility of the underlying asset value c an increase in the systematic risk (beta) of the asset underlying the option d more than one of the above e none of the above 12 Which of the following is not a reason why the appropriate discount rate for a real option is ambiguous? a Options are always more volatile than the assets on which they are based b Returns on options are inherently non-normal c Returns on options are asymmetric d The volatility of an option changes with changes in the value of the underlying asset e The expected value of cash flows from a real option are difficult to estimate 13 Financial options are easier to value than real options for each of the following reasons except a Exercise prices on financial options are contractually written on a single financial price that is readily observable in the financial market b Markets for real assets have fewer imperfections than financial markets c Real asset markets typically are less competitive than financial markets d Each of the above is a reason why financial options are easier to value e None of the above is a reason why financial options are easier to value 14 Uncertainty that is outside the firm’s control is called uncertainty a amorphous b compound c endogenous d exogenous e foreign CH 20 Multiple Choice The perfect market assumptions include each of the following except a equal access to registered brokers b equal access to market prices c frictionless markets d no costs of financial distress e rational investors Frictionless financial markets could have which of the following? a agency costs b bid-ask spreads c brokerage fees d government intervention e irrational investors Which of the following conditions is sufficient to ensure an operationally efficient market? a b c d e frictionless markets perfect competition rational investors more than one of the above none of the above The benefits of international diversification are limited by the lack of in foreign markets a adequate information b free convertibility of currencies c liquidity d more than one of the above e none of the above You live in New York and buy a share of Phillips at a price of 166 euros At the end of the year, you receive a dividend of euros and the stock price is 160 euros If the euro appreciates by 8% during the year, what was your percentage return in dollars for the year? a -10% b -1% c +7% d +9% e +11% You live in London and have invested in shares of Societe Gererale de Belgique at a price of €52.00 By the end of the year you have received dividends of €1.00, share price has risen to €54.50, and the pound has fallen 20% against the euro Which of the following is closest to your pound sterling return for the year? a -15% b 0% c +7% d +28% e +33% A stock in India rises 20% in local terms The Indian rupee rises 25% against the U.K pound sterling What is the return in pound sterling? a -5% b 0% c 5% d 45% e 50% A stock in India rises 20% in local terms Pound sterling rises 25% against the Indian rupee What is the return in pound sterling? a -4% b 0% c 4% d 45% e 50% What is the variance on the Indian (Rp = rupee) stock market to a Canadian investor if Var(rRp) = 0.105, Var(sC£/Rp) = 0.088, and the local Indian stock market is independent of the value of the rupee? a -0.017 b 0.017 c 0.193 d cannot be determined from the given information e none of the above 10 The standard deviation of return to the Indian stock market is 24.8% in local currency The standard deviation of the Indian rupee against the Canadian dollar is 30.2% Ignoring interactions between the Indian stock market and the value of the Indian rupee, what is the standard deviation of return of the Indian market to a Canadian investor? a 0.550 b 0.153 c 0.391 d cannot be determined from the given information e none of the above 11 Which of a) through c) is false? a The risk of an individual asset when held in a portfolio with a large number of assets depends on its covariance with other assets in the portfolio b As the number of assets held in a portfolio increases, the covariance terms begin to dominate the portfolio variance calculation c The extent to which risk is reduced by portfolio diversification depends on how highly the individual assets in the portfolio are correlated d All of the above are ANS: True e All of the above are ANS: False 12 Suppose E[rA] = 14.8%, A = 17.9%, E[rB] = 17.1%, and B = 31.9% Assuming a meanvariance framework, which of the following statements is true? a A is preferred to B b B is preferred to A c A and B are equally desirable d Whether A or B is preferred depends on the correlation between the two assets e Which asset is preferred depends on individual preferences Exhibit T20.1 Return statistics Canada France Germany Japan Switzerland U.K U.S US 30-day  (%) 10.4 14.0 12.5 15.4 14.2 14.6 11.8 7.2  (%) 18.8 29.1 30.0 36.5 25.5 29.4 17.8 3.3 CN 0.472 0.388 0.320 0.464 0.513 0.727 -0.055 Correlation Coefficients FR € JP SW UK 0.645 0.399 0.618 0.559 0.482 -0.071 0.364 0.670 0.451 0.443 -0.041 US 0.430 0.369 0.569 0.304 0.504 0.522 -0.059 -0.119 -0.061 -0.042 13 Based on Exhibit T20.1, what is the standard deviation of an equal-weighted portfolio of Canadian and French equities? a 4.5% b 17.4% c 20.7% d 24.1% e 30.7% 14 Based on Exhibit T20.1, what is the Sharpe index of an equal-weighted portfolio of Canadian and French equities? a 0.138 b 0.209 c 0.236 d 0.241 e 0.288 15 Based on Exhibit T20.1, what is the standard deviation of an equal-weighted portfolio of Japanese and Swiss equities? a 16.6% b 17.4% c 19.3% d 26.4% e 35.9% 16 Based on Exhibit T20.1, what is the Sharpe index of an equal-weighted portfolio of Japanese and Swiss equities? a 0.138 b 0.209 c 0.236 d 0.241 e 0.288 ANS: E 17 Which of a) through d) is false? a If an asset’s returns are distributed as normal, then its return distribution can be completely described by its mean and variance of return b Returns on foreign stocks are leptokurtic c Correlation and covariance measure how closely two assets move together d The correlation coefficient between two assets is the covariance scaled by the standard deviations of the two assets e All of the above are ANS: True 18 Which of a) through d) is false? a The systematic risk of a portfolio is measured by the standard deviation (or variance) of return on the portfolio b If two assets are perfectly correlated, then the standard deviation of a portfolio of these two assets is a simple weighted average of the standard deviations of the assets c The variance of a portfolio with N securities is calculated as a weighted average of the N2 cells in the variance-covariance matrix d The standard deviation of a portfolio of assets is a simple weighted average of the expected returns of the assets e All of the above (a-c) are False 19 Which of a) through c) is false? a That portion of an individual asset’s risk that cannot be diversified away by holding the asset in a large portfolio is called systematic risk b That portion of an individual asset’s risk that cannot be diversified away by holding the asset in a large portfolio is called market risk c That portion of an individual asset’s risk that cannot be diversified away by holding a portfolio with many securities is called nondiversifiable risk d More than one of a) through c) is ANS: False e All of a) through c) are ANS: True 20 Which of a) through c) is true? a Both domestic and foreign nominal cash flows are exposed to purchasing power risk b The real value of a future foreign currency cash flow in the domestic currency depends on domestic inflation c Hedging foreign currency risk substitutes exposure to domestic purchasing power risk for exposure to currency risk d All of the above are True e Two of the above are True 21 are not an impediment to the free flow of capital across national borders a Foreign exchange controls b Capital inflow and outflow controls c Stamp taxes d Transactions costs e All of the above are impediments to the flow of capital 22 Which of the following could account for investors’ tendency to favor local assets? A the additional information costs of international diversification B the ability of a domestic stock portfolio to hedge domestic inflation risk C the higher returns typically earned on foreign investments a A and B b B and C c A and C d all three of the above e only one of the above CH 21 Multiple Choice The traditional capital asset pricing model requires several assumptions in addition to an assumption of perfect markets Which of the following is not one of these assumptions? a asset returns are certain b everyone can borrow and lend at the riskfree rate of interest c investors have homogeneous expectations d investors want more nominal return and less risk in their functional currency e nominal returns are normally distributed Which of the following statements about market model beta is ANS: False a Market model beta is estimated by regressing an asset’s returns on market returns b Market model beta captures that part of the variation in an individual asset that is linearly related to the market return c Market model beta measures an asset’s total risk d Market model beta is a correlation coefficient scaled by two standard deviations e The beta of the riskfree asset is zero Which of statements a) through c) regarding “Roll’s critique” is true? a If a mean-variance efficient market index is used as a performance benchmark, then the algebra of the CAPM requires that beta and only beta explains mean return b If performance is measured relative to an index that is ex post inefficient, then any ranking of portfolio performance is possible c Roll’s critique does not apply to the international asset pricing model d All of the above are True e Only two of statements a) through c) are True Why Roll and Ross [“On the cross-sectional relation between expected returns and betas,” Journal of Finance 1994] call the CAPM “ a shaky base for modern finance?” a the almost pathological knife-edged nature of the expected return-beta OLS crosssectional relation b the CAPM neglects nonlinear elements of return c the CAPM requires the presence of a riskfree asset d more than of the above e none of the above In addition to the assumptions of the traditional capital asset pricing model, which of the following conditions are necessary for the international asset pricing model to hold? a investors have identical consumption baskets b investors only care above dollar returns c purchasing power parity holds d more than of the above e none of the above Which of the following statements regarding the hedge portfolio in the international asset pricing model is false? a If inflation is a constant in each currency, then the hedge portfolio reduces to the investor’s home-currency riskfree asset b The hedge portfolio consists of domestic and foreign bonds c The hedge portfolio serves as a store of value d The hedge portfolio serves to hedge domestic inflation risk e The hedge portfolio serves to hedge the currency risk of foreign assets Which of statements a) through d) is false? a Home asset bias is an indication of a segmented national market b In completely segmented national markets, the systematic risk of an asset depends on its sensitivity to local market factors c Purchasing power parity holds in segmented financial markets d more than of the above is false e none of the above are false Which of the following statements concerning arbitrage pricing theory (APT) is false? a APT assumes a linear relation between required return and systematic risk b APT does not identify what factors are priced in the market c APT identifies market risk as a factor that is priced by the market d Roll’s critique does not apply to the APT e The systematic risk factor in the one-factor market model is the difference between actual market index returns and the mean market return Which of statements a) through c) regarding Chen, Roll and Ross’ [“Economic forces and the stock market,” Journal of Business 1986] application of APT is false? a By itself, the market factor is statistically significant because all stocks are exposed to systematic macroeconomic risks that underlie returns to the market portfolio b The coefficients on the macroeconomic factors were not statistically significant c When market portfolio indices were included along with Chen, et al.’s macroeconomic factors, the market factor had an insignificant coefficient d All three of the above (a-c) are ANS: False e Two of the above (a-c) are ANS: False 10 Which of the following statements concerning the one-factor market model is false? a A high correlation means that points lie relatively closely around a regression line b The one-factor market model captures the exposure of an individual security to fluctuations in the market factor c The slope of a market model regression is equal to one d The one-factor market model estimates betas for use in the security market line e The market portfolio is often proxied by a domestic stock portfolio 11 Macroeconomic factors that are sources of systematic risk include each of the following except a analysts’ earnings estimates b industrial production c inflation expectations d unexpected inflation e all of the above are sources of systematic risk 12 Empirical studies find that factors dominate factors in explaining individual security returns a global… industry and national b global and industry… national c global and national… industry d national… global and industry e national and industry… global 13 Fama and French’s [“The Cross-Section of Expected Stock Returns,” Journal of Finance 1992] model of stock returns includes factors for A the market index B firm size a b c d e C relative financial distress relative financial distress, and the domestic and global market indices relative financial distress, the market index, and analysts’ earnings forecasts relative financial distress, the market index, and currency risk relative financial distress, the market index, and firm size relative financial distress, the market index, and industrial production 14 Fama and French’s [“The Cross-Section of Expected Stock Returns,” Journal of Finance 1992] model the relative financial distress factor as a the book value of equity b the market value of equity c the difference in mean return between the smallest 10 percent of firms and the largest 10 percent of firms d the difference in mean return between value and growth stock portfolios e none of the above 15 Empirical studies typically find which of the following? a Large stocks tend to have higher mean returns than small stocks in international markets b Growth stocks tend to have higher mean returns than value stocks in international markets c Stocks with high market model betas tend to have higher mean returns than stocks with low betas in international markets d more than one of the above e none of the above 16 Strategies that selectively buy or sell individual securities based on their recent return performance are called strategies a fundamental b market timing c momentum d trendline e none of the above 17 are difficult to reconcile with informationally efficient markets a Market factors b Momentum effects c The size effect d The value premium e None of the above are difficult to reconcile with an efficient market 18 Which of statements a) through c) regarding the currency risk exposure of large multinational corporations is false? a Multinational corporations are likely to be exposed to currency risk b Investors will prefer that managers hedge currency risk if the firm’s expected future cash flows can be increased through hedging c Managers have little need to hedge exposures to currency risks that are diversifiable from the shareholders’ perspective d Two of the above are ANS: False e Each of the statements is ANS: True 19 Which of the following statements concerning De Santis and Gérard’s “How Big is the Premium for Currency Risk” [Journal of Financial Economics 1998] conditional asset pricing model is false? a Their model constrained risks and required returns to be constant over time b Currency risk is a small fraction of total risk in the United States stock market c Market risk is priced in international stock markets d Currency risk is priced in international stock markets e All of the above are true 20 Which of statements a) through d) concerning Jorion’s “The pricing of exchange rate risk in the stock market” [Journal of Financial and Quantitative Analysis 1991] multi-factor analysis of currency risk is false? a Exchange rate risk is diversifiable and is not priced in the stock market b The exchange rate factor is subsumed into Chen, Roll and Ross’s [“Economic forces and the stock market,” Journal of Business 1986] five macroeconomic factors c The exchange rate factor is subsumed into the market index when the market index is added to the exchange rate factor d There is little cross-sectional variation in the exchange rate exposure of individual firms and industries e All of the above are True