Question

A U.S. Investor converts dollars to euros and buys 1,000 shares of Credit Agricola (A big Portuguese bank) for 10€ per share. By the end of one year the shares increased by 10% but the euro depreciated by 2%. At that time he sold the shares and repatriated his investment to dollars. His total return was,__________ (be sure to carry out your calculation to the nearest basis point (two digits to the left of the decimal place). Question 26 options: Question 27 (1 point) While the market for housing in different countries is a good illustration of a product that conforms to the Absolute Form of Purchasing Power Parity the markets for gold and other internationally traded commodities provide a good illustration of the relative form of Purchasing Power Parity. Question 27 options: a) True b) False Question 28 (1 point) A British pension plans converts some of its pounds to euros and buys 100,000 shares of Renault SA (a French car manufacturer) for 86.00€. The portfolio manager expects that the stock will appreciate at a rate of 6.00% for each of the next five years. He also expects the euro to appreciate against the pound at a rate of 5.00% for each of the next five years. If everything goes to plan by how much will his wealth increased over the course of the next five years?

Answer 1

Q. 26). Solution :- Buying value of shares = 1000 * 10 = 10000 Euro.

Sale value of shares = Increased number of shares * Decreased value of Euro.

= (1000 + 10 % of 1000) * (10 - 2 % of 10)

= (1000 + 100) * (10 - 0.20)

= 1100 * 9.80

= 10780 Euro.

Total return = Sale value of shares - Buying value of shares.

= 10780 - 10000

= 780 Euro.

Return (% terms) = Total return / Buying value of shares.

= 780 / 10000

= 0.078 i.e., 7.80 % (0.078 * 100)

Conclusion :- i). Total return = 780 Euro.

ii) Return in percent terms on initial shares bought = 7.80 % (approx).

Q. 27). Answer :- Option a). True.

Explanation :- The statement given in question is very true i.e., correct one only.