Emerging Market Finance

Emerging Finance Market

Professor J.P. Mei

1. The history of world investment since 1900 suggests that:

a. Long-term investors should put all their money in the strongest economies of the time.

b. U.S. has always been the best bet for long-term investors.

c. Germany has always been the best bet for long-term investors.

d. Russia had never been a good bet at any time during the first part of the 20th century.

e. None of the above

2. At the end of 2000, emerging markets capitalization accounted for roughly ____ of total world market capitalization. Emerging market population accounted for roughly ____ of total world population.

a. 20%, 70%

b. 9%, 85%

c. 15%, 85%

d. 12%, 75%

e. 40%, 90%

3. The following statement is true:

a. Over the 1986-1997 period, the best performing emerging equity markets were in Asia.

b. Over the 1986-1997 period, all Asian markets outperformed the US market.

c. Over the 1986-1997 period, many emerging markets under-performed the US market.

d. Estimates of mean returns for emerging markets are not sensitive to time period covered.

4. Studies by the Heritage Foundation shows that:

a. There is no relationship between economic growth rates and economic freedom index.

b. There is positive relationship between economic growth rates and economic freedom index.

c. There is negative relationship between economic growth rates and economic freedom index.

d. High economic freedom always leads to higher economic growth.

5. In the next 25 years, the dependency burden (percentage of non-working population in the economy) in many Southeast Asian countries are going to

a. remain constant.

b. increase dramatically like Japan.

c. increase over time.

d. decrease over time.

6. Emerging market investment may not achieve the expected returns due to following factors:

a. little TFP increase

b. weak financial system

c. financial market speculation

d. high debt level

e. all of the above

7. Thailand may take a shorter time to recover comparing to Japan due to following factors except

a. They are still in the catch up phase.

b. Low tax burden

c. Strong banking sector

d. Good fiscal condition

8. In countries where capital controls are in place, the following statement is true:

a. Shares for foreign investors always sell at a premium to domestic shares.

b. Shares for foreign investors always sell at a discount to domestic shares.

c. Huge discount on foreign shares suggests one can earn riskless arbitrage profits by short selling domestic shares and long foreign shares.

d. None of the above

9. If stock returns are 60% and -40% in period 1 and 2, we can say that

a. One can obtain an average compounded return of 15% during the period.

b. Geometric means are always greater or equal to arithmetic means.

c. If one compound arithmetic mean returns, one will always get the actual return during the sample period.

d. The compounded return is less than 10%.

10. The following statement is false:

a. Most emerging equity market returns do not follow normal distribution.

b. There tend to be positive serial correlation for emerging market stocks in the short run.

c. There tend to be negative serial correlation for emerging market stocks beyond 2 to 3 years.

d. Conventional derivatives pricing tends to be over-priced in emerging markets due to excess kurtosis.

11. The exchange rates for Chinese Yuan is 8.3 Yuan/dollar, Thai Baht is 35 B/dollar. If Big Mac is selling 10 Yuan in China, 75 B in Bangkok and $2.50 in the US, then according to PPP, which currency is over-valued:

a. Chinese Yuan b. Thai Baht c. Both d. Neither

12. In 1995, both US and Thai currencies were fairly valued. The exchange rate was 25 Baht/dollar. Today, the exchange rate is 35 Baht/dollar. In the meantime, the US inflation has gone up 25% and Thai inflation was 50%. According to relative PPP, Baht is ______ with respect to US currency.

a. undervalued b. overvalued c. fairly valued d. none of the above

13. The one year interest rate on US bond is 5.5% while the one-year rate on Japanese bond is 1%. According to the Fisher condition, Yen is expected to ______ against the dollar.

a. appreciate 4.5% b. depreciate 4.5% c. appreciate 1.5% d. depreciate 1.5%

14. Most recently, which of the following country had a financial crisis:

a. Russia b. Thailand c. Turkey d. Brazil

15. According to studies by Professor Mei, which of the following factors is most useful in predicting EM financial crises from 1993-1997:

a. Short-term debt to GDP ratio

b. Corruption index

c. Real exchange rate over-valuation

d. Political election

16. Studies by Prof. Harvey and others have shown the following except:

a. IICCR and short-term debt are highly correlated across EM countries.

b. IICCR and per capita GDP are highly correlated across EM countries.

c. Improvements in a country’s IICCR are significantly related to increase in equity returns.

d. Improvements in a country’s IICCR are significantly related to increase in GDP growth.

17. In order to achieve higher expected returns, SSB EM Asset Allocator does the following except:

Overweight countries with falling interest rates
Underweight countries with above average returns over the last 12 months
Overweight low beta countries
Overweight low market-to-book countries
Overweight countries with low current account deficit

18. Which of the follow is generally not a characteristic of EM currency returns:

a. Positive serial correlation in the short-run.

b. Negative serial correlation in the short-run.

c. High skewness and kurtosis.

d. Cross-correlation and Currency Market Contagion.

e. Currency market movements are somewhat predictable.

19. According to behavior economics, market momentum is mostly due to:

a. People do not always prefer more money to less.

b. People tend to "frame" things into different categories.

c. People are loss-averse.

d. People like to buy high-tech stocks.

20. According to Prof. Mei, the following are warning signs one can use to spot “irrational exuberance” in EM real estate with the only exception of:

a. Price increase at much faster pace than net rent.

b. Real Estate equity shares are selling at several times the multiple of other shares.

c. Buildings are selling at many times the replacement value.

d. Cap Rate falls way below the average market dividend yield.

e. All of the above.

21. Based on capital budgeting with real options,

a. One should always reject a project if NPV <0 based on simple NPV computation.

b. One should always launch a project immediately if NPV > 0 based on simple NPV computation.

c. One should always reject a project immediately if NPV < 0 based on total NPV computation.

d. One should always launch a project immediately if NPV > 0 based on total NPV computation.

22. Based on capital budgeting with real options,

a. The NPV of flexibility is always positive.

b. The NPV of flexibility is always negative.

c. The NPV of flexibility is always non-negative.

d. Total NPV is always greater than simple NPV.

23. Based on the following cash flow, the value of flexibility when I=900 is the following, assuming investor has the option of delay.

a. 200 b. 300 c. 50 d. 85 e. none of the above

	1	2	... T...	Probability
Good state	150	150	... 150...	50%
Bad state	50	50	... 50...	50%

24. Based on the following cash flow, the total NPV of the project is the following, assuming the investment has a salvage value of 700 after one year but zero thereafter. NO delay is allowed. The one time investment is 950.

a. 10 b. -30 c. 50 d. -85 e. none of the above

	1	2	...	Probability
Good state	150	150	...	50%
Bad state	50	50	...	50%

25. Given the following information, compute the cost of equity capital for TLCC using the Goldman Fully Integrated model:

	Mean Return	Standard Deviation	Correlation with S&P 500
TLCC	15%	30%	0.5
S&P 500	10%	10%

The country sovereign yield spread is 250 bps. The US treasury has a yield of 5%. The correlation between bonds and stocks is 0.6.

a. 10%

b. 12%

c. 15%

d. 20%

e. none of the above

26. According to JP Mei, the main drivers for EM residential real estate are the following except:

a. High population growth

b. High economic growth

c. Poor existing living conditions

d. Inflation Hedge

e. Consistent high capital gains

27. Which of the following carries the most weight in Salomon Smith Barney Emerging Market Equity Allocator

a. Value Rank

b. Growth Rank

c. Risk Rank

d. Interest Rate Rank

e. Momentum Rank

28. The Brady agreements have produced one of the following outcomes for emerging markets:

a. Reduce debt carrying costs

b. Stifle economic growth

c. Increase borrowing costs

d. Help Establishing domestic bond markets

29. According to Kent Hargis, discount rates are composed
of the following three factors

except:

a. Risk Free Rate

b. Measures of Risk

c. Price of Risk

e. Industry risk

30. According to Kent Hargis, which of the following is least important for EM Risk and Risk Premia measures:

a. Fit historical data

b. Capture equity risk in addition to credit risk

c. Distinguish between high and low expected returns

d. Forward looking

e. Implementable for most markets on a timely basis

Essay:

1. What are the main risks of the Mozel project? How are addressed?

2. What are some of the unique features of Infosys from EM investors' perspective?