MZUMBE UNIVERSITY - SCHOOL OF BUSINESS (SOB)
DEPARTMENT OF ACCOUNTING AND FINANCE
ACC 361: INTERNATIONAL FINANCE
REVIEW QUESTIONS EIGHT
Question One:
Mr. Waluwalu is a local entrepreneur doing business in Dar es Salaam. For
long time, Waluwalu has been considering investing his money in stock
market. He approaches a stockbroker about investing in stocks. The stock
broker gave waluwalu two stock options that he can invest in; Stock X and
Stock Y. The stockbroker further tells Waluwalu that the economy can either go
in recession or it will be boom. Upon further enquiry Mr. Waluwalu established
that the likelihood of observing an economic boom is two times as high as
observing an economic recession. He also learnt the following regarding the
possible returns of the two stocks:
State of the Economy
Rx
Ry
Boom
10%
-2%
Recession
6%
40%
Required:
i.
For each stock calculate the expected returns and total risk (Variance
and standard deviation).
ii.
iii.
Calculate the covariance of the returns of the two stocks
Mr. Waluwalu is considering creating two different portfolios. Portfolio I
consists of 10% invested in X and reminder in Y, while Portfolio II has
equal proportions in both stocks. Compute the expected returns and risk
of each portfolio and explain the risk- return characteristic of each
portfolio.
Question Two:
An investor in the in Tanzania takes TZS1,000,000 on January 1, 2002 and
invests in shares traded on the Nairobi stock Exchange (NSE). On January 1,
2002 the spot rate was TZS 20/KES 1so the investor received KES 50,000 and
this amount was used to acquire shares trading in NSE at KES 50 per Share.
On January 1, 2003 the investor sold the shares at a price of KES 55 per share
and converted the amount back to Tanzania shillings at TZS18/KES 1.
Required:
Calculate the return in Tanzania Shillings from foreign investment.
Question Three:
An investor in the in Tanzania takes TZS22,000,000 on January 1, 2002 and
invests in shares traded on the Nairobi stock Exchange (NSE). On January 1,
2002 the spot rate was KES 0.04/TZS 1 so the investor received KES 880,000
and this amount was used to acquire shares trading in NSE at KES 100 per
Share. During the year ending 31 December 2002, the company paid KES 20
per Share as dividend. On January 1, 2003 the investor sold the shares at a
price of KES 90 per share and converted the amount back to Tanzania shillings
at KES 0.05/TZS 1.
Required:
i.
Calculate total dividend paid
ii.
Calculate total capital gain /loss
iii.
Calculate rate of return in Tanzania shilling from foreign investment
Question Four:
You are an Investment adviser and a client has approached you seeking your
assistance on international diversification. Specifically, he wants to know on
the major components of risk in international diversification and the benefit of
international diversification.
The client was able to gather the following information of the two country (ABC
and XYZ).
Details
Expected return
Expected risk
ABC
14%
15%
XYZ
18%
20%
Correlation
0.34
coefficient(ABC,XYZ)
Rate of return from the treasury stock is 7.8% and market foreign beta of a
portfolio is 1.8. The client intends to invest his fund in equal proportion in both
countries.
Required:
i.
Briefly explain the two main components of risk in international
diversification in your explaination include the benefits of international
diversification
ii.
Calculate the risk of international portfolio
iii.
Calculate the expected return of a portfolio
iv.
Calculate Sharpe ratio and Treynor ratio
Question Five:
You have identified two quoted shares which you believe will exhibit negative
correlation in their possible returns over the next year, as follows:
Predicted rate of return
State
Probability
Hi-tech Plc
Wanaume Plc
A
0.30
25%
14%
B
0.45
22%
18%
C
0.25
12%
20%
a. Calculate the expected return, variance and standard deviation of each
security
b. calculate the covariance between the two securities and the correlation
coefficient
c. You construct a portfolio consisting of 70% by value of High-tech shares
and 30% of Wanaume shares. Calculate the expected return, variance and
standard deviation of the portfolio form these figures.
Question Six:
During the year the British gilts went from £102 to £106, while paying a
coupon of £9. At the same time, the exchange rate went from £1:$1.76 to
£1:$1.62. What was the total dollar return, in percent, on gilts for the year?
Question Seven:
Use the following data to answer the questions that follow:
Country
Correlation with
Standard deviation of
Tanzania market
returns
Tanzania
1.00
18.2
Mzumbeland
0.60
21.9
The Republic of Kinje
0.33
34.4
Required:
a. Calculate the foreign market betas relative to the Tanzania market,
b. State how each of the foreign market’s returns will behave relative to the
Tanzania market in case of economic recession.
c. Calculate the risk of an internationally diversified portfolio that is equally
invested in Tanzania and in each of the individual foreign country markets.
State in each case whether the risk of the internationally diversified
portfolio is considerably below or above the risk of the Tanzania portfolio.
Question Eight:
Jigger Startz, a US citizen, holds a portfolio of Argentinean securities that
earned a return of 14% last year measured in US dollars. If the portfolio also
earned 19.7% measured in Argentinean pesos, what must have been the
currency return?
Question Nine:
Tris Speaker bought a Japanese stock one year ago when it sold for 280 yen
per share and the exchange rate was $008/yen. The stock now sells for 350
yen and the exchange rate is $0.01 per yen. The stock paid no dividends over
the year. What was Tris’s rate of return on this stock? What would be the rate
of return on the stock to a Japanese investor?
Question Ten:
Why is international diversification attractive to an investor who already has a
well-diversified domestic portfolio?