Question 3 What is the "peso problem"? O Expectations are realized on average, and returns from interest arbitrage are zero. O Even when exchange rates are fixed, investors often demand a premium for interest arbitrage, so the return from arbitrage can be positive or negative. O Pegged currencies are less stressful for investors because there is no room for speculation. O Returns from interest arbitrage are always positive, even when the peg breaks. Question 5 In part, the banking crisis and the Great Recession may have been avoided if: O the flow of capital from emerging markets had been invested by developed markets more efficiently. the U.S. Federal Reserve Bank had kept post-911 interest rates lower for a longer period of time. O the government had reduced financial industry oversight. O developed market exchange rates had been stronger. Question 6 Investors' decisions to invest in a risky asset can be analyzed by using the Sharpe ratio, which measures the: O home interest rate plus the inflation differential minus home exchange rate depreciation. difference in nominal interest rates divided by the change in the foreign nominal interest rate. mean of the difference in returns divided by the standard deviation of the differences. O ratio of exchange rate depreciation between Home and Foreign