Asked by Ellen Sypolt on May 09, 2024
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Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%.
If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be
A) 12.0%.
B) 12.5%.
C) 13.0%.
D) 15.5%.
Fixed Exchange Rate
A country's currency value that is tied to another single currency or to another measure of value, like gold, and does not fluctuate in the market.
Covariance
A measure used in statistics and finance to assess how changes in one variable are associated with changes in another variable.
Canadian Stock Market
A financial market in Canada where securities, equities, bonds, and other financial instruments are traded.
- Comprehend the key concepts of effective international diversification.
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Learning Objectives
- Comprehend the key concepts of effective international diversification.