FIN 451 All Weeks Problem Set

y the active portfolio? What is the M 2 ?
CHAPTER 19
5. Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share.
The investor has $10,000 to invest, and the current exchange rate is $2/£. (LO 19-2)
a. How many shares can the investor purchase?
b. Fill in the table below for rates of return after one year in each of the nine scenarios
(three possible prices per share in pounds times three possible exchange rates).
Price per
Share (£)
Pound-Denominated
Return (%)
Dollar-Denominated Return for
Year-End Exchange Rate
$1.80/£ $2/£ $2.20/£
£35
£40
£45
c. When is the dollar-denominated return equal to the pound-denominated return?
8. Calculate the contribution to total performance from currency, country, and stock selection
for the manager in the following table. All exchange rates are expressed as units of
foreign currency that can be purchased with one U.S. dollar. (LO 19-4)
EAFE
Weight
Return on
Equity Index E1/ E0
Manager’s
Weight
Manager’s
Return
Europe .30 20% 0.9 .35 18%
Australia .10 15 1.0 .15 20
Far East .60 25 1.1 .50 20
2. John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the
head of the Investment Committee of General Technology Corporation, to establish a new
pension fund. Darwin asks Irish about international equities and whether the Investment
Committee should consider them as an additional asset for the pension fund. (LO 19-3)
a. Explain the rationale for including international equities in General’s equity portfolio.
Identify and describe three relevant considerations in formulating your answer.
b. List three possible arguments against international equity investment, and briefly discuss
the significance of each.
c. To illustrate several aspects of the performance of international securities over time, Irish
shows Darwin the accompanying graph of investment results experienced by a U.S. pension
fund in the recent past. Compare the performance of the U.S.-dollar and non-U.S.-dollar
equity and fixed-income asset categories, and explain the significance of the result of the
account performance index relative to the results of the four individual asset class indexes.
performance index relative to the results of the four individual asset class indexes.