An investor in Toronto is considering a new equity investment. She is considering investing overseas, but is
Question:
An investor in Toronto is considering a new equity investment. She is considering investing overseas, but is not sure if it will be worth the added exchange rate risk. After reading several forecasts for both the expected equity returns and the expected exchange rate changes, she develops the table given below.
Expected Returns for a Canadian-Based Investor
Country Local Currency Equity Returns Exchange Rate Returns Exchange Rate Returns
Japan 10% 1.3%
United Kingdom 13.5% -2.0%
United States 11.4% 0
a) Based on the expected local currency equity returns only, which country looks like the best investment opportunity?
b) Calculate her actual expected total returns including the expected exchange rate changes and report the results. Where should she invest her money?