Question

Q. Assume that you are a U.S. investor who is considering investments in the German

(Stocks A and B) and British (Stocks C and D) stock markets. The world market risk

premium is 4.5%. The currency risk premium on the euro is 1%, and the currency risk

premium on the pound is -1%. In the United States, the interest rate on one-year risk free bonds is 4%.

In addition, you are provided with the following information:

Stock                  A                  B                  C             D

Country      Germany       Germany       UK         UK

Bw               1.5                    0.90               1            1.5

Y€                1                      0.80              -0.25      1.0

Y£            -0.25            0.75          1.0       -0.5

Calculate the expected return for each of the stocks. The U.S. dollar is the base currency

Answer 1

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Answer:

Expected Return for stock A using the version for International CAPM:

E(R_{B) =} R_f + β_W(RP_w)+γ€ (RP_€)+γ£(RP_£)

= 0.04+1.5(0.045)+1(0.01)+-0.25(-0.01)

= 0.12

Expected Return for stock B using the version for International CAPM:

=0.04+0.9*(0.045)+0.8*(0.01)+0.75*(-0.01)

= 0.081

Expected Return for stock C using the version for International CAPM:

=0.04+1*(0.045)+-0.25*(0.01)+1*(-0.01)

= 0.0725

Expected Return for stock D using the version for International CAPM:

=0.04+1.5*(0.045)+-1*(0.01)-0.5*(-0.01)

=0.1025