Ab Finance

1. Do the following end-of-chapter problems from your course text:

(A) Chapter 11: page 297 – questions: #5 (Rob)

Page 299 – the Detroit Motors’ mini case. Please limit your mini case response to no more than 1 page.

(B) Chapter 12: page 324 – questions: #1 and #4 (Rob)

(C) Chapter 13: page 347 – questions: #2 and # 6 (Rob)

(D) Chapter 15: pages 395 – questions: #1 and #3 (Srini)

Question #1: What factors are responsible for the recent surge in international portfolio investment?

International portfolio investment has been growing rapidly in recent years due to:

a) The deregulation of financial markets

b) The introduction of such investment vehicles as international mutual funds, country funds, and internationally cross-listed stocks, which allow investors to achieve international diversification without incurring excessive costs.

Investors diversify to reduce risk; the extent to which risk is reduced depends on the co-variances among individual securities in the portfolio. Since security returns tend to co-vary much less across countries than within a country, investors reduce portfolio risk more by diversifying internationally than purely domestically.

Question #3: Explain the concept of the world beta of a security.

The world beta measures the sensitivity of a national market to world market movements. Formally, the world beta is defined as βi = σiW/σW2. For example, if the world beta of a national market is 1.2, it means that as the world market moves up and down by 1%, the national market goes up and down respectively by 1.2%.

Problem #1

Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago.

Exchange rate - $1.15 per euro

Investment – 10000 euros = $11500 …… (i)

Price - $120 = 120/1.15 = 104.35 euros …. (ii)

Rate of return in USD = (135-120)/120 = Ri = ~12.5% …. (iii). the investor has benefited from Microsoft share price appreciation from $135 to...