INTERNATIONAL BUSINESS FINANCE INTERNATIONAL BUSINESS FINANCE

FINS3616
Tutorial Tutorial
Week 12
Chapter 20 + 21
CHAPTER 20 PROBLEM 1
Based on the historical returns in Figure 20.2, calculate the
mean and standard deviation of return in dollars for an equally
weighted portfolio of French and German stocks. Calculate the
Sharpe index for this portfolio using the historical mean on U.S.
T-bills as the risk-free rate.
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CHAPTER 20 PROBLEM 3
The MSCI world stock market index in Figure 20.2 had a mean
annual return of 11.3% and a standard deviation of 17%.
Meanwhile, dollar returns to a globally diversified bond
portfolio had a mean of 8.4 and a standard deviation of 10.8%.
The correlation between these two indices was 0.360. Calculate
the mean and standard deviation of an equally weighted
portfolio of global stocks and bonds. Also, calculate the Sharpe
index for this stock-bond portfolio using the historical 6.8% U.S.
T-bill rate.
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CHAPTER 20 PROBLEM 5
Suppose expected returns in the U.S. and Germany are 10% and
20% respectively. Standard deviations are also 10% and 20%
respectively. Calculate the standard deviation of an equally
weighted combination of the two assets under the following
four cases:
I. Perfect positive correlation
II Perfect negative correlation II. Perfect negative correlation
III. Zero correlation
IV. A correlation of 0.3
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CHAPTER 20 PROBLEM 7
Suppose you calculated a Sharpe index for every security in the
world over the most recent year. Are any of these securities
likely to exhibit performance (measured as excess return per
unit of risk) that is superior to that of the world market
portfolio? Why or why not?
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CHAPTER 20 PROBLEM 9
The Philippine stock market in Makati rises 12% in Philippine
pesos. During the same period, the peso rises from
$0.0425/Peso to $0.0440/Peso. By how much does the
Philippine stock market rise in U.S. dollars?
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CHAPTER 20 PROBLEM 11
How much of the return variance on a foreign stock investment
is likely to come from variations in the foreign stock market and
how much from variation in the exchange rate? What are the
proportions for a foreign bond investment?
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CHAPTER 20 PROBLEM 13
You are planning for retirement and must decide on the inputs
to use in your asset allocation decision. Knowing the benefits of
international portfolio diversification, you want to include
foreign stocks and bonds in your final portfolio. What statistics
should you collect on the worlds major debt and equity
markets? Can you trust that the future will be like the past?
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CHAPTER 21 PROBLEM 1
Calculate the equity required return under each of the
following, assuming the CAPM holds:
I. The risk-free rate is 8%, beta is 1.5, and the market risk
premium is 8.5%.
II. The risk-free rate is 4%, beta is 1.2, and the market risk II. The risk free rate is 4%, beta is 1.2, and the market risk
premium is 8.5%.
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CHAPTER 21 PROBLEM 3
As a security analyst for the London branch of Merrill Lynch, you
have identified the following factors and factor sensitivities for
British Petroleum (BP):
Prod Prod Oil Oil Spot Spot
E[r] F F F = + + +
Factors and factor sensitivities are as follows:
FACTORS BETAS
F
Prod
Changes in world industrial production
Prod
= +1.50
F Change in crude oil prices

Oil
= 0.80
F
Oil
Change in crude oil prices
F
spot
Change in the value of GBP against a basket of
foreign currencies

Spot
= +0.01
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g
CHAPTER 21 PROBLEM 3
BPs expected return if all factors are equal to their expectation
i 14% is = 14%.
A. All else constant, is British Petroleums share price likely to
go up or down with an increase in world industrial
production? With an increase in crude oil prices? With an
increase in the value of the pound?
B. What is the expected return on BP stock in a year when
world industrial production is 2% above the expectation, oil
prices rise unexpectedly by 10%, and the spot rate (S
/f
) goes
down by 5%?
C. If BP stock rises by 4% during this period, by how much does
BP over- or underperform its expectation?
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CHAPTER 21 PROBLEM 5
As a security analyst for the New York branch of Deutsche Bank,
you have identified the following factors and factor sensitivities
for Amazon.com (AMZN):
M M Z Z D D
E[r] F F F = + + + This is basically
Fama & French
Factors and factor sensitivities are as follows:
FACTORS BETAS
F
m
Market Factor
(Rm Rf)

F
= +1.00
F
Z
Firm Size Factor
(small minus large stock returns)

Z
= +0.10
F
Relative Financial Distress
D
= +0.05
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F
D
(value minus growth stock returns)

D
CHAPTER 21 PROBLEM 5
Amazons expected return if all factors are equal to their
expectation is = 10%.
A. What is Amazons expected return in a year when each
factor is 1% lower than its expectation?
B. If Amazon.coms stock price rises by 12%during this period, B. If Amazon.coms stock price rises by 12% during this period,
by how much does Amazon.com over- or under-perform its
expectation? expectation?
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CHAPTER 21 PROBLEM 7
The regional directors of a major investment bank are discussing
strategies for their respective countries.
A. As a director of North American investment strategy based
on momentum to your foreign colleagues.
B. As director of European investments, do you think such a B. As director of European investments, do you think such a
momentum-base strategy will work in your markets? Why or
why not? why not?
C. As director of Latin American investments, do you think a
momentum-based strategy will work in your markets? Why
or why not?
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