Question

4. A U.S. investor is considering purchasing $1 million worth of Canadian stock. The dividend yield is 3% per annum, and the expected percentage change in the Canadian dollar price of the stock is 6% per annum. Expected appreciation of the Canadian dollar is +1% per annum. U.S. interest rates are ½% per annum, while Canadian interest rates are 1% per annum. Local-currency stock returns have an annualized standard deviation of 20%. $/C$ exchange rate percentage changes have an annualized standard deviation of 8%. The correlation between exchange rate and local-currency stock returns is .2.

a) What is the expected return on an uncovered investment in Canadian stock from the

perspective of a U.S. investor?

b) How risky is the investment?

c) What approximately is the risk and expected return on a covered investment in Canadian

stock? How would you cover?

Answer 1