Let the expected pound return on a U.K. equity be 15%, and let its volatility be 20%.

Question:

Let the expected pound return on a U.K. equity be 15%, and let its volatility be 20%. The volatility of the dollar/pound exchange rate is 10%.

a. Graph the (approximate) volatility of the dollar return on the U.K. equity as a function of the correlation between the U.K. equity’s return in pounds and changes in the dollar/pound exchange rate.

b. Suppose the correlation between the U.K. equity return in pounds and the exchange rate change is 0. What expected exchange rate change would you need if the U.K. equity investment is to have a Sharpe ratio of 1.00? (Assume that the risk-free rate is 0 for a U.S. investor.) Does this seem like a reasonable expectation?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...