Asked by Alyssa Noriega on Jul 22, 2024
Verified
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 150. 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%.
Expected Return
The average amount of profit or loss one can anticipate on an investment, accounting for the probabilities of varying outcomes.
Standard Deviation
A statistic that measures the dispersion of dataset relative to its mean and is calculated as the square root of the variance.
Covariance
A measure that indicates the extent to which two securities move in the same or opposite directions.
- Fathom the critical concepts of risk and return in overseas portfolio allocations, incorporating the advantages of spreading risks and the repercussions of exchange rate fluctuations.
Verified Answer
YJ
YUYANG JIANGJul 23, 2024
Final Answer :
D
Explanation :
The expected return on the portfolio is calculated as the weighted average of the expected returns of the individual investments. Here, it's (0.5 * 18%) + (0.5 * 13%) = 9% + 6.5% = 15.5%.
Learning Objectives
- Fathom the critical concepts of risk and return in overseas portfolio allocations, incorporating the advantages of spreading risks and the repercussions of exchange rate fluctuations.