mc test bank - ch11 to 17 and ch 20,21.docx
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multiple choice questionsTRANSCRIPT
CH 11
Multiple Choice
1. 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 exposurec. transaction exposured. translation exposuree. none of the above
2. Change in financial accounting statements arising from unexpected changes in currency values is called ____ to currency risk.a. economic exposure b. operating exposurec. transaction exposured. translation exposuree. none of the above
3. 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 exposurec. transaction exposured. translation exposuree. none of the above
4. 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 exposurec. transaction exposured. translation exposuree. none of the above
5. Operating cash flows that are exposed to currency risk are affected primarily by ____.a. changes in domestic inflationb. changes in foreign inflationc. changes in nominal exchange ratesd. changes in real exchange ratese. none of the above
6. Monetary cash flows that are exposed to currency risk are affected primarily by ____.a. changes in domestic unemploymentb. changes in foreign unemploymentc. changes in nominal exchange ratesd. changes in real exchange ratese. none of the above
7. When goods markets are segmented from other markets, goods prices are determined ____.a. in foreign marketsb. in the global marketc. in the local marketd. all of the abovee. none of the above
8. The classic exporter has ____.a. both revenues and expenses that are determined globallyb. both revenues and expenses that are determined locallyc. revenues that are determined locally and expenses that are determined globallyd. revenues that are determined globally and expenses that are determined locallye. none of the above
9. The classic importer has ____.a. both revenues and expenses that are determined globallyb both revenues and expenses that are determined locallyc revenues that are determined locally and expenses that are determined globallyd revenues that are determined globally and expenses that are determined locallye none of the above
10. The globally competitive multinational corporation typically has ____.a. both revenues and expenses that are determined globallyb. both revenues and expenses that are determined locallyc. revenues that determined locally and expenses that are determined globallyd. revenues that determined globally and expenses that are determined locallye. none of the above
11. The ____ is positively exposed to the real value of the domestic currency.a. classic exporterb. classic importerc. typical domestic firmd. globally competitive firm
e. none of the above
12. The ____ is negatively exposed to the real value of the domestic currency.a. classic exporterb. classic importerc. typical domestic firmd. 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 supplyb. money supply for a given change in interest ratesc. price for a given percentage change in quantity demandedd. quantity demanded for a given percentage change in pricee. none of the above
14. Exposure to currency risk ____.a. can be thought of as a regression coefficientb. cannot be measured by conventional methodsc. is equal to the price elasticity of demandd. is equal to the variability of currency valuese. is equal for all companies
15. Operating exposure to currency risk is most effectively managed by ____.a. hedging with currency forwards or futuresb. hedging with currency optionsc. hedging with real assetsd. hedging with virtual assets e. none of the above
16. A disadvantage of real asset hedges is that ____.a. bid-ask spreads can be largeb. daily marking to market can cause cash flow mismatchesc. option premiums can be larged. they come in only a limited number of currencies and maturitiese. they involve substantial sunk costs
17. ____ are relatively insensitive to currency fluctuations. a. Domestic firmsb. Exportersc. Importersd. 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 valuesc. exchange rates given a percentage change in valued. value given a percentage change in exchange ratese. 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 denominationc. not at alld. one for onee. 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 denominationc. not at alld. one for onee. none of the above
21. Shareholders exposure to currency risk is equal to ____.a. assets less liabilitiesb. credits less debits c. net monetary assets plus real assetsd. 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 abovee. 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 changesb. varying pro forma operating performance within reasonable limitsc. varying the exchange rate and assessing the resulting competitive position of the firmd. more than one of the abovee. none of the above
25. Operational hedges can create value by ____.a. reducing agency costs.b. reducing expected taxesc. reducing costs of financial distress d. more than one of the abovee. 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 riskb. financial market transactions are zero-NPV transactionsc. the costs of buying or selling financial instruments are low compared to the costs of
investing or disinvesting in real assetsd. the uncertain cash flows of operating exposures to currency risk are exactly offset by the
uncertain outcomes of a financial market hedgee. 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 diversificationb. currency and product market diversificationc. geographic and product market diversificationd. currency and virtual diversificatione. none of the above
28. Multinational corporations have an advantage over domestic firms in their ____.a. market selection and promotion strategiesb. plant location decisionsc. product sourcing decisionsd. more than one of the abovee. 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 abovee. 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. betab. price elasticity of demandc r-square d. slope coefficiente. none of the above
CH 12
Multiple Choice
1. Translation accounting methods include each of a) through d) except the ____ method.a. current/noncurrent b. temporalc. monetary/nonmonetaryd. current ratee. all of the above are translation accounting methods
2. 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 #8e. none of the above are elements of FAS #8
3. Net exposed assets equal ____.a. assets less liabilitiesb. exposed assets less exposed liabilitiesc. shareholders’ equityd. more than one of the abovee. none of the above
4. FAS #52 specifies each of the following rules except ____.a. all assets and liabilities (including common equity) are translated at the current
exchange rateb. dividends paid are translated at the current exchange ratec. 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 #52e. none of the above are elements of FAS #52
5. To maximize shareholder wealth, managers should only hedge translation exposure if it ____.a. affects the total risk of the firmb. involves accounting profitsc. involves cash flowsd. is conveniente. none of the above
6. 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
7. 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 liabilitiesc. values real assets at historical rates that more reliably reflect asset valued. more than one of the abovee. none of the above
8. The relation of stock returns to earnings surprises around the time of corporate earnings announcements is measured with ____.a. a beta coefficientb. an earnings response coefficientc. the price elasticity of demandd. the sensitivity of share price to exchange ratese. none of the above
9. Information-based reasons for hedging translation exposure include each of the following except ____.
a. The quality of accounting information can be improved.b. Meeting profit forecasts retains management’s credibility in the marketplacec. Information costs can be reduced in a perfect market.d. Credit ratings are tied to accounting performance rather than cash flow.e. 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 valueb. historical costc. historical exchange ratesd. markete. 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 taxesb. information asymmetries c. large bid-ask spreadsd. the perfect market assumptionse. 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. credit riskc. reaction by analysts or investorsd. SEC disclosure requirementse. 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 volumesb. increased risks of litigation over accounting disclosure practicesc. increased share price sensitivity to underlying financial pricesd. lower trading volume sensitivity to changes in underlying financial pricese. lower bid-ask spreads
CH 13
Multiple Choice
1. According to the text, sources of country risk include ____.
a. expropriation risk and default riskb. expropriation risk and other political risksc. financial risk and socioeconomic riskd. political risk and financial riske. political risk and socioeconomic risk
2. Political risks arise because of ____.
a. investment agreements between MNCs and host governmentsb. the methods used to identify particular political risksc. unexpected events in a country’s financial, economic, or business lifed. unexpected changes in the political environment within a host country or in the
relationship of a host country to another countrye. none of the above
3. Country risk can affect the value of a multinational corporation through ____.
a. changes in future cash flowsb. changes in investors’ required return on investmentc. changes in managers’ actionsd. more than one of the abovee. none of the above
4. Companies that rate country risk ____.
a. produce country risk ratings that are positively correlated with each otherb. produce country risk ratings that are negatively correlated with each otherc. produce country risk ratings that are uncorrelated with each otherd. seldom provide assessments of micro riskse. use Morgan Stanley Dean Witter’s rating system to produce their ratings
5. Examples of macro country risks include each of the following except ____.
a. unexpected changes in a host country’s tax rates b. unexpected changes in a host country’s fiscal policiesc. unexpected changes in a host country’s monetary policies d. unexpected changes in a host country’s bankruptcy or ownership laws e. unexpected changes in a host country’s regulations on the use of migrant workers
6. Political risk includes each of the following except ____.a. expropriationb. potential loss of intellectual property rightsc. protectionismd. risks arising from dealing with an unfamiliar culturee. the risk of disruptions in operations
7. Political risk is greatest ____.
a. in monarchiesb. in democraciesc. as a result of armed conflictd. when there is a marginal (or fractional) change in governmente. when an incumbent political party imposes its agenda on foreign-based MNCs
8. Blocked funds are a drain on project value when ____.
a. a project suffers early lossesb. they are blocked in the host economyc. they are generated by real assetsd. they cannot be immediately repatriated to the parent corporatione. they cannot earn their required return in the host country
9. Intellectual property rights include each of the following except ____.a. copyrightsb. monopoly access to a marketc. patentsd. proprietary technologiese. secret formulas
10. Macroeconomic factors that affect country risk assessments include each of the following except ____.
a. currency risk b. expropriationc. inflation d. interest rate risk
11. Qualitative factors that affect country risk assessments include each of the following except
____.a. cancellations of contracts by a host governmentb. currency risk c. loan defaults or restructuringsd. losses from exchange controlse. payment delays
12. The text describes each of the following strategies for managing country risk except ____.a. disclose material risks in the firm’s financial statementsb. negotiate the environment with the host country.c. obtain political risk insurance.d. plan for disaster recovery.e. structure operations to minimize the MNC’s risk exposure and maximize return.
13. Insurable political risks possess each of a) through d) except ____.a. A large number of individuals or businesses are exposed to the risk. b. The expected loss over the life of the contract is estimable. c. The loss is identifiable in time, place, cause, and amount. d. The loss is outside the influence of the insured. e. Insurable political risks possess more than one of the above.
14. Political risk insurance can be obtained on which of a) through c)?a. currency incontrovertibilityb. expropriationc. repatriation restrictionsd. more than one of the abovee. none of the above
15. Much of the 1990’s growth in political risk insurance was due to ____.a. increasing political uncertainty in developed countriesb. increasing political uncertainty in developing countriesc. the collapse of the Iron Curtaind. the withdrawal of private insurers from the markete. the growth in project finance
16. Ways to limit the MNC’s exposure to country risk include which of a) through d)?a. enlist local partnersb. limit dependence on a single partnerc. limit the scope of the technology transferd. use more stringent investment criteriae. more than one of the above
17. A ____ can be obtained on processes, products, machines, and new chemical compounds.a. copyrightb. patentc. trademarkd. trade secrete. none of the above
18. A ____ prohibits the unauthorized reproduction of creative works including books, magazines, drawings, paintings, musical compositions, and sound and video recordings.a. copyrightb. patentc. trademarkd. trade secrete. none of the above
19. A ____ is a distinctive name, word, symbol, or device used to distinguish a company’s goods or services from those of its competitors.a. copyrightb. patentc. trademarkd. trade secrete. none of the above
20. A ____ is a proprietary idea, process, formula, technique, or device that a company uses to its competitive advantage.a. copyrightb. patentc. trademarkd. trade secrete. none of the above
CH 14
Multiple Choice
1. Expected future cash flows are estimated by ____ only incremental cash flows and ____ all opportunity costs. a. including; includingb. including; excludingc. excluding; includingd. excluding; excludinge. none of the above
2. Nominal cash flows in a foreign currency should be discounted ____.a. at a nominal discount rate in the foreign currencyb. at a rate reflecting the parent’s opportunity cost of capital in the domestic currencyc. at a weighted average cost of capitald. at the cost of debte. at the cost of equity
3. Which of the following is false?a. Cash flows in a particular currency should be discounted in that currency.b. Cash flows should be discounted at the opportunity cost of capital. c. Cash flows to equity should be discounted at the weighted average cost of capital. d. Nominal cash flows should be discounted at nominal discount rates.e. Real cash flows should be discounted at real discount rates.
4. Which of steps a) through d) is inappropriate when discounting foreign currency cash flows using the parent’s perspective?a. Estimate expected future cash flows from the project in the foreign currency and put
them on a time line.b. Convert expected future cash flows into the domestic currency at the current spot
exchange rate.c. Identify the appropriate risk-adjusted discount rate in the domestic currency for the
project.d. Calculate the NPV in the domestic currency.e. Each of the above is appropriate.
5. If a project has a positive NPV from both the parent’s and the project’s perspective, then the parent firm should ____.a. accept the projectb. reject the projectc. accept the project and try to capture the value in the foreign currency todayd. reject the project and continue to look for positive-NPV projects in the foreign currencye. none of the above
6. If a project has a positive NPV from the parent’s perspective but a negative NPV from the project’s perspective, then the parent firm should ____.a. accept the projectb. reject the projectc. accept the project and try to capture the value in the foreign currency todayd. reject the project and continue to look for positive-NPV projects in the foreign
currencye. none of the above
7. If a project has a negative NPV from the parent’s perspective but a positive NPV from the project’s perspective, then the parent firm should ____.a. accept the projectb. reject the projectc. accept the project and try to capture the value in the foreign currency todayd. reject the project and continue to look for positive-NPV projects in the foreign countrye. none of the above
8. If a project has a positive NPV but the NPV is greater from the project’s than from the parent’s perspective, then the parent firm should ____.a. accept the projectb. reject the projectc. accept the project and hedge the foreign currency cash flowsd. reject the project and continue to look for positive-NPV projects in the foreign countrye. none of the above
9. A project has a net present value of NPV€ = €10,000. In order to invest in the project, the German government requires that you undertake another project with the following cash flow stream: CF0
€ = -€5000, E[CF1€] = €1000, E[CF2
€] = €1000, and E[CF3€] = €1000. The
appropriate discount rate for this project is i€ = 10%. What affect does this tie-in project have on your original NPV€ estimate?a. It increases NPV€ from €10,000 to €12,513.15.b. It increases NPV€ from €10,000 to €17,486.85.c. It decreases NPV€ from €10,000 to €7,486.85.d. It increases NPV€ from €10,000 to €2,513.15.e. It is a separate project and has no effect on NPV.
10. Suppose the government of Germany offers you a 3-year, non-amortizing €50,000 loan to entice you to undertake a particular project within its borders. In addition, the government offers you an attractive rate of i€ = 10% when loans of similar risk yield a return of i€ = 15%. The German tax rate is 50%. What is the present value of the interest subsidy on this loan?a. €2854.03
b. €3108.56c. €3250.66d. €4895.60e. €5708.06ANS: C
10. Refer to Exhibit T15.1. Assume that the appropriate discount rate for the cash flows in Exhibit T15.1 is i€ = 5%. What is the NPV€ in euros?a. €25,598.43b. €26,232.48c. €27,232.48d. €29,000.00e. €29,432.52
11. Refer to Exhibit T15.1. Assume the international parity conditions hold. The current spot rate is S0
£/€ = £2/€. If i£ = 7% and i€ = 5%, what is the expected future spot rate [E(S3£/€ )] at
time t = 3?a. £1.890/€b. £1.963/€c. £2.020/€d. £2.116/€e. £2.250/€
12. Refer to Exhibit T15.1. Assume the international parity conditions hold. The current spot rate is S0
£/€ = £2/€. If i£ = 7% and i€ = 5%, what is NPV£?a. £48,591.54b. £50,786.92c. £52,464.96d. £54,527.33e. £55,328.10
13. Refer to Exhibit T15.1. Assume the international parity conditions do not hold . Expected future spot rates are: E(S1
£/€) = £2.060/€, E(S2£/€) = £2.100/€, and E(S3
£/€) =£2.220/€. Calculate NPV£ by converting euros to pounds at the expected future spot rates and discounting in pounds. Assume S0
£/€ = £2/€ and i£ = 7%.a. NPV£ = £52,464.96b. NPV£ = £52,978.31c. NPV£ = £53,015.25d. NPV£ = £53,716.36
Exhibit T15.1 -€1,000
+€10,000 +€10,000 +€10,000
t=1 t=2 t=3
e. NPV£ = £54,142.84
14. Refer to Exhibit T15.1. Suppose there is a 10% chance that the host government will seize the assets of the project in year 3. If the assets are not seized, you expect to receive the cash flows as shown. If the assets are seized, you expect to receive repatriated funds in year 1 and year 2 only. Assuming international parity conditions hold, S0
£/€ = £2/€, i€ = 5%, and i£ = 7%, what is the NPV in pounds?a. £42,431.49b. £47,018.46c. £47,368.32d. £49.652.21e. £50,737.29
15. Refer to Exhibit T15.1. Suppose that beginning in year 1, there is a 10% chance each year the host government will seize the project’s assets. If the assets are not seized, you expect to receive the cash flows as stated above. If the assets are seized in a particular year, you expect to receive no repatriated funds thereafter. Assuming international parity conditions hold, S0£/€ = £2/€, i€ = 5%, and i£ = 7%, what is the NPV in pounds?a. £42,431.49b. £47,018.46c. £47,368.32d. £49.652.21e. £50,737.29
16. Refer to Exhibit T15.1. Assume that 50% of the project’s expected cash flows are retained in host country until the project is 3 years old. The opportunity cost of these funds is i€ = 5%, but blocked funds earn no interest. What is the net present value of the opportunity cost from these blocked funds? a. €569.16b. €598.24c. €625.80d. €658.68e. €683.22
CH 15
Multiple Choice
1. In their famous articles on the cost of capital, corporation finance and the theory of investment, Modigliani and Miller made each of the following assumptions except ____. a. equal access to bid and ask pricesb. homogeneous investor expectationsc. homogeneous business risk classesd. perpetual cash flows
e. rational investors
2. Factors contributing to financial market segmentation include each of the following except ____. a. different investor expectations b. different legal, political, or tax systemsc. informational barriers d. rational investorse. transactions costs
3. Foreign political risk includes each of the following except ____.a. unexpected changes in expropriation riskb. unexpected changes in foreign exchange ratesc. unexpected changes in local ownership limitationsd. unexpected changes in repatriation restrictionse. unexpected changes in taxes
4. Which of a) through d) is true?a. A particular political risk is more likely to be diversifiable by local investors than by
international investors.b. A political risk such as an election imposes higher costs of capital on MNCs held by
globally diversified investors. c. From the perspective of managers in the multinational corporation, political
risk is not diversifiable.d. Global investors are exposed to a multinational corporation’s total risk, measured by
standard deviation of return in the investors’ functional currencies.e. None of the above
5. A firm’s debt sells for £10 million and equity for £30 million. The firm’s before-tax cost of debt is 9%. Its cost of equity is 18%. The corporate tax rate is 33%. The firm’s weighted average cost of capital is closest to which of the following?a. 6%b. 9%c. 12%d. 15%e. 18%
6. The cost of capital for a project in Spain should ____.a. be a function of the riskiness of the project b. equal the minimum rate of return necessary to induce investors to buy or hold the
firm’s stockc. equal the nominal required return for a similar U.S. investmentd. equal the parent’s weighted average cost of capital
e. equal the rate used by Spanish investors to capitalize corporate cash flows
7. Which of the following does not fit in a list of potential sources of capital for foreign direct investment?a. funds generated internally by the foreign affiliateb. funds from elsewhere within the corporationc. funds from sources external to the corporation but within the parent countryd. funds from sources external to the corporation but within the host countrye. each of the above can be a source of funds
8. The firm’s existing WACC is appropriate as a discount rate on a proposed investment when ____.A. the project is financed with debt from the host countryB. the project has the same systematic business risk as the rest of the firmC. the project is not exposed to foreign political riskD. the optimal financial structure of the project is identical to that of the firmSelect one of the following:a. A and Bb. A and Cc. B and Cd. B and De. C and D
9. The corporate cost of debt can be approximated by ____.a. regressing stock returns on market returnsb. the average historical rate of 8.2 percent on corporate debtc. the coupon rate on existing corporate debtd. the riskfree rate of interest on government bondse. the yield to maturity on existing corporate debt
10. The yield to maturity on a junk bond ____ investors’ required return.a. equalsb. overstatesc. preempts d. understatese. none of the above
11. Erb, Harvey, and Viskanta [“Political Risk, Financial Risk and Economic Risk,” Financial Analysts Journal, Nov./Dec. 1996] found which of a) through c)?a. An increase in country risk tends to be followed by a rise in equity returns. b. Emerging markets with high country risk tend to have less volatile returns than
markets with low country risk. c. Emerging markets with high country risk tend to have lower betas than
markets with low country risk.
d. More than one of the above.e. None of the above.
12. International sources of funding for foreign investment projects include each of a) through d) except ____.a. cash flow from other international divisionsb. interest rate and currency swapsc. international debt and equityd. project financee. all of the above are sources of funding for international investment projects
13. A targeted registered offering must satisfy which of requirements a) through d)?a. Interest or dividends must be paid directly to individuals in foreign countries.b. The issuer must certify that it has no knowledge that a U.S. taxpayer is the
owner of the security.c. The registered owner must be a U.S. financial institution. d. The securities must be issued in registered form.e. More than one of the above
14. Each of a) through d) can be valued as a separate side effect except ____.a. blocked fundsb. expropriation riskc. negative-NPV tie-in projectsd. subsidized financinge. each of the above can be valued as a side effect
15. Vehicles for repatriating funds from a foreign affiliate to the parent include each of the following except ____.a. Dividend payments on equityb. Higher prices on sales to key suppliersc. Interest payments on debtd. Lease payments on operating and financial lease agreementse. Royalties and management fees
16. Stakeholders prefer internally generated funds to external funds because ____.a. internal funds avoid the discipline of the financial marketsb. internal funds avoid the transactions costs of external issuesc. they indicate the corporation has free cash flowd. more than one of the abovee. none of the above
17. Most countries specify that transfer prices be set at ____.a. an arm’s length or market priceb. cost
c. cost plus a profit margind. the maximum price that the market will beare. none of the above
18. Which of statements a) through d) concerning project finance is false?a. Debt in a project finance arrangement is contractually linked to the cash flow
generated by the project.b. Governments participate in project finance in the form of infrastructure support,
guarantees, and assurances against political risk.c. In project finance, claims are contractually tied to the cash flows of the project.d. The cash flows of a project are commingled with other corporate cash flows.e. The project is a separate legal entity and relies heavily on debt financing.
19. Which of a) through d) would not be a good candidate for project finance?a. natural resource developmentsb. power generation projectsc. telecommunicationd. toll roads and bridges e. All of the above are good candidates for project finance
20. Empirical studies of the capital structure of corporations in the United States have generally agreed that leverage increases with each of the following except ____.a. fixed assetsb. advertising and research/development expendituresc. nondebt tax shieldsd. growth opportunitiese. firm size
21. Rajan and Zingales [ “What Do We Know about Capital Structure? Some Evidence from International Data,” 1995] found that leverage increases with ____.a. the tangibility of the firm’s assetsb. the presence of growth optionsc. the level of profitabilityd. all of the above are associated with higher leveragee. none of the above are associated with higher leverage
22. Rajan and Zingales [ “What Do We Know about Capital Structure? Some Evidence from International Data,” 1995] found that leverage decreases with ____.a. the tangibility of the firm’s assetsb. profitabilityc. firm sized. all of the above are associated with higher leveragee. none of the above are associated with higher leverage
23. Empirical studies find that emerging market returns tend to have ____a. lower volatilities than developed market returnsb. lower correlations with the world market portfolio than developed market
returnsc. less political risk than developed market returnsd. more than one of the above e. none of the above
24. Empirical studies find that financial market liberalizations tend to ____a. increase local firms’ cost of capital b. increase the correlation of emerging market returns with world market returns c. increase the volatility of emerging market returnsd. more than one of the abovee. none of the above
25. The ____ method is the most popular approach to project valuation.a. adjusted present valueb. Goldman Sachsc. opportunity cost methodd. price elasticity of demande. weighted average cost of capital
CH 16Multiple Choice
1. ____ tax neutrality ensures that incomes arising from foreign and from domestic operations are taxed similarly by the domestic government.a. Domestic b. Foreignc. Globald. two or more of the abovee. none of the above
2. ____ tax neutrality ensures that taxes imposed on the foreign operations of domestic companies are similar to those facing local competitors in the host countries.a. Domestic b. Foreignc. Globald. two or more of the abovee. none of the above
3. National tax policies influence each of the following characteristics (a through c) of the multinational corporation except ____.
a. the organizational forms in which multinational corporations choose to operateb. the types and locations of assets held c. the way in which the multinational corporation finances its operationsd. Each of the above is are influenced by national tax policiese. National tax policy has little effect on any of the above
4. In a(n) ____ tax system, the multinational’s worldwide income is taxed by the home country as this income is repatriated to the parent company.a. explicitb. implicitc. globald. territorial e. worldwide
5. In a(n) ____ tax system, only domestic income is taxed by the domestic government. Foreign-source income is not taxed as long as it is earned in an active business. a. explicitb. implicitc. globald. territorial e. worldwide
6. Implicit taxes include which of the following?a. asset taxes b. higher pre-tax required returns in countries with high tax ratesc. income taxes d. value-added taxese. none of the above
7. Which of a) through d) is not a form of explicit tax? a. asset taxesb. tariffs on cross-border tradec. value-added taxesd. withholding taxes e. all of the above are explicit taxes
8. Withholding taxes are most frequently found on which income category?a. assets b. capital gains c. dividends d. royalties e. value-added
9. Value-added taxes are a form of ____.a. capital gains taxb. implicit taxc. income taxd. sales taxe. tariff on cross-border trade
10. Implicit taxes arise from ____.a. a failure to hide income from the taxing authoritiesb. a nation’s labor lawsc. the law of one priced. value additivitye. none of the above
11. Tax rates in countries B and S are tB = 40% and tS = 25%, respectively. Pre-tax required returns in B are iB = 25%. What should be the pre-tax required return in S?a. 5%b. 10%c. 15%d. 20%e. none of the above
12. Active income earned from a foreign branch is taxed by the U.S. government ____.a. after pooling this income with all other income sourcesb. as funds are repatriated to the U.S. parent corporationc. as it is earned in the foreign countryd. at the foreign tax ratee. none of the above
13. Foreign branches of a U.S. corporation are treated as ____.a. a domestic corporationb. a controlled foreign corporationc. a part of the parent rather than as a separate legal entityd. slaves to the master corporatione. none of the above
14. The United States allows a foreign tax credit against U.S. income taxes up to ____.a. £200,000 b. £1,000,000
c. the amount of consolidated foreign-source incomed. the amount of foreign taxes paide. the amount of taxes paid globally
Exhibit T17.1
Switzerland India a Dividend payout ratio 100% 100%b Foreign dividend withholding tax rate 5% 20% c Foreign corporate income tax rate 10% 65%
15. Consider Exhibit T17.1. A U.S.-based firm has £10,000 in foreign-source income from Switzerland. What is the dividend paid to the U.S. parent?a. £8,500b. £8,550c. £9,000d. £9,500e. £10,000
16. Consider Exhibit T17.1. A U.S.-based firm has a single foreign subsidiary in Switzerland with £10,000 in foreign-source income. What foreign tax credit is generated by the subsidiary?a. £0b. £500c. £1,000d. £1,450e. £1,500
17. Consider Exhibit T17.1. A U.S.-based firm earns £10,000 from Switzerland and £10,000 from India. The firm has no other foreign operations. What are total foreign tax credits on a consolidated basis?a. £1,150b. £7,200c. £7,500d. £8,650e. £10,000
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. £3,000c. £5,000d. £8,000e. 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 corporationb. foreign affiliate c. foreign sales branchd. wholly-owned subsidiarye. none of the above
20. The intent of the foreign tax credit is to ____.a. avoid double taxation of foreign-source incomeb. ensure national sovereigntyc. ensure that foreign multinationals pay their fair share of the tax burdend. pay for social programse. none of the above
21. The overall FTC limitation applies to ____.a. consolidated foreign-source incomeb. consolidated global incomec. domestic as well as foreign corporationsd. passive investment incomee. 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 rulesb. income basketsc. the overall FTC limitationd. Subpart F incomee. 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 subsidiariesb. dividends received from less-than-10% owned companiesc. income from active foreign branchesd. interest received from more-than-50% owned subsidiariese. management fees received from active subsidiaries
24. Reinvoicing centers should be located in countries with each of the following except ____.a. access to Eurocurrency marketsb. low explicit taxesc. low implicit taxesd. sound physical and legal infrastructuree. 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 intangibleb. gross operating margins are lowc. intermediate products have no market priced. operations are in a single tax jurisdictione. 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 countryb. disclosure requirements in the foreign country are highc. earnings are expected to be negative in the early years of operationsd. the potential for litigation over foreign operations is highe. 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 creditsc. the income is from a low-tax country and the firm has no excess foreign tax creditsd. the income is from a high-tax country and the firm has no excess foreign tax creditse. 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 creditsc. the income is from a low-tax country and the firm has no excess foreign tax creditsd. the income is from a high-tax country and the firm has no excess foreign tax creditse. none of the above
CH 17
Multiple Choice
1. An option with more than one source of uncertainty is called a(n) ____ option.a. amorphous
b. complex
c. compound
d. rainbow
e. switching
2. 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
3. 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
4. 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
5. 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
6. 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
7. 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
8. 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
9. 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 20Multiple Choice
1. The perfect market assumptions include each of the following except ____.a. equal access to registered brokersb. equal access to market pricesc. frictionless marketsd. no costs of financial distresse. rational investors
2. Frictionless financial markets could have which of the following?a. agency costsb. bid-ask spreadsc. brokerage feesd. government interventione. irrational investors
3. Which of the following conditions is sufficient to ensure an operationally efficient market?a. frictionless marketsb. perfect competitionc. rational investorsd. more than one of the above
e. none of the above
4. The benefits of international diversification are limited by the lack of ____ in foreign markets.a. adequate informationb. free convertibility of currenciesc. liquidityd. more than one of the abovee. none of the above
5. 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 4 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%
6. 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%
7. 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%
8. 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%
9. 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. -0.017b. 0.017c. 0.193d. cannot be determined from the given informatione. 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. 0.550b. 0.153c. 0.391d. cannot be determined from the given informatione. 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 mean-variance 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
Correlation Coefficients(%) (%) CN FR € JP SW UK US
Canada 10.4 18.8France 14.0 29.1 0.472Germany 12.5 30.0 0.388 0.645Japan 15.4 36.5 0.320 0.399 0.364Switzerland 14.2 25.5 0.464 0.618 0.670 0.430U.K. 14.6 29.4 0.513 0.559 0.451 0.369 0.569U.S. 11.8 17.8 0.727 0.482 0.443 0.304 0.504 0.522US 30-day 7.2 3.3 -0.055 -0.071 -0.041 -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. 0.138b. 0.209c. 0.236d. 0.241e. 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. 0.138b. 0.209c. 0.236d. 0.241e. 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 controlsb. Capital inflow and outflow controlsc. Stamp taxesd. Transactions costse. 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 diversificationB the ability of a domestic stock portfolio to hedge domestic inflation risk C the higher returns typically earned on foreign investments
a. A and Bb. B and Cc. A and C d. all three of the abovee. only one of the above
CH 21
Multiple Choice
1. 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 certainb. everyone can borrow and lend at the riskfree rate of interest c. investors have homogeneous expectationsd. investors want more nominal return and less risk in their functional currencye. nominal returns are normally distributed
2. 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.
3. 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.
4. Why do 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 cross-sectional relation
b. the CAPM neglects nonlinear elements of returnc. the CAPM requires the presence of a riskfree assetd. more than of the abovee. none of the above
5. 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 basketsb. investors only care above dollar returnsc. purchasing power parity holdsd. more than of the abovee. none of the above
6. 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.
7. 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 falsee. none of the above are false
8. 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.
9. 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 nationalb. global and industry… national c. global and national… industryd. national… global and industrye. 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 indexB firm sizeC relative financial distress
a. relative financial distress, and the domestic and global market indicesb. relative financial distress, the market index, and analysts’ earnings forecastsc. relative financial distress, the market index, and currency riskd. relative financial distress, the market index, and firm size
e. 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 equityb. the market value of equityc. the difference in mean return between the smallest 10 percent of firms and the largest 10
percent of firmsd. the difference in mean return between value and growth stock portfoliose. 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 abovee. none of the above
16. Strategies that selectively buy or sell individual securities based on their recent return performance are called ____ strategies.a. fundamentalb. market timingc. momentumd. trendlinee. none of the above
17. ____ are difficult to reconcile with informationally efficient markets.a. Market factorsb. Momentum effectsc. The size effectd. The value premiume. 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.