# The equity market had the highest average local

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21. The __________ equity market had the highest average local currency standard deviation between 2001 and 2005. A. Turkish B. Finnish C. Indonesian D. U.S. E. none of the above See Table 25.9. Difficulty: Moderate 22. The __________ equity market had the lowest average local currency standard deviation between 2001 and 2005. See Table 25.9. Difficulty: Moderate 23. In 2005, the U.S. equity market represented __________ of the world equity market. See Table 25.1. Difficulty: Moderate 25-8

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Chapter 25 - International Diversification 24. The straightforward generalization of the simple CAPM to international stocks is problematic because __________. All of the above factors make a broad generalization of the CAPM to international stocks problematic. Difficulty: Moderate 25. The yield on a 1-year bill in the U.K. is 8% and the present exchange rate is 1 pound = U.S. \$1.60. If you expect the exchange rate to be 1 pound - U.S. \$1.50 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is A. -6.7% B. 0% C. 8% D. 1.25% E. none of the above r(US) = [1 + r(UK)]F0/E0 - 1; [1.08][1.50/1.60] - 1 = 1.25%. Difficulty: Moderate 25-9
Chapter 25 - International Diversification 26. Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. \$1.60. The 1-year forward rate is 1 pound = \$1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security? 1.05 = (1 + r) X [1.57/1.60] - 1; r = 7.0%. Difficulty: Moderate 27. The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C\$ = US \$0.78. The 1-year forward rate is C\$ = US \$0.76. The return (denominated in U.S. \$) that a U.S. investor can earn by investing in the Canadian security is __________. 1.08[0.76/0.78] = x - 1; x = 5.23%. Difficulty: Moderate 25-10

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Chapter 25 - International Diversification 28. Suppose the 1-year risk-free rate of return in the U.S. is 4% and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. \$1.65. A 1-year future exchange rate of __________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing the British security. 1.04/1.07 = x/1.65; x = 1.6037. Difficulty: Moderate
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