CMA Exam Quiz 06

Which of the following is(are) the reason(s) why the foreign diversification is less effective in more recent years?
I. Because foreign diversification reduces less risk with international traders.
II. Because foreign diversification of domestic stocks has more risk than foreign stocks.
III. Because correlation between foreign and domestic stocks has increased markedly.
IV. Because correlation between foreign and domestic stocks has less appeal amongst investors due to high volatility.

Investors have considered which of the following shortcuts to owning foreign stocks that allow them to keep their money at home?
I. Investing in American Depository Receipts(or ADRs)
II. Investing in stocks of the same companies listed on foreign stock exchanges
III. Investing in the stocks of U.S. multinational firms that have extensive sales but with little to no production in foreign countries
IV. Investing in the stocks of U.S. multinational firms that have extensive sales or production in foreign countries

ADRs are negotiable certificates issued by a U.S. bank with rights to the underlying shares of stock held in trust at which of the following?
I. Custodian banks
II. Local banks
III. International banks
IV. Private banks

American investors find investing in ADRs very convenient compared with investing in which of the following?
I. Shares in indices
II. Shares in bonds and equity
III. Foreign currencies
IV. Shares in foreign stock markets.

It’s important to recognize that arbitrage will ensure that the returns on ADRs and on the underlying foreign stocks are identical except for which of the following?
I. Payable dividends.
II. Transactions costs.
III. Underlying protocols.
IV. Standard procedures.

Why is it possible to invest in a wide variety of foreign stocks through ADRs?
I. There are more than 4,000 ADRs for firms from every country that has n active stock market.
II. There are almost 3,000 ADRs available in the U.S. market
III. They are more reputable in caparison to other markets.
IV. They have a proven track record of other markets.

If traders notice price discrepancies between the prices of ADRs and the underlying stocks, they will do which of the following?
I. Find other means where prices of the two match.
II. Report the findings towards investors.
III. Make an arbitrage profit.
IV. Take action in a riskless profit.

Some investors believe that ADRs allow investors to avoid exchange risk because of which of the following statements?
I. Because they are priced in dollars
II. Because they are priced according to the latest market price
III. Because they are priced in local currency
IV. Because they are priced according to local price

In regards to all financial assets, if trading is infrequent, price discrepancies may at times develop between the prices of which of the following?
I. the underlying foreign shares
II. the ADRs
III. the foreign market
IV. the equity stocks

Governments like Singapore put restrictions on foreign ownership of the underlying shares in the local
market mainly becvause of which of the following?
I. So discrepancies between ADR prices and the prices of the underlying shares may remain persistently minimum.
II. So that they can prevent arbitrage from working.
III. So discrepancies between ADR prices and the prices of the underlying shares may remain persistently large.
IV. So that they can work with arbitrage themselves.