A U.S. investor is considering purchasing $1 million worth of Canadian stock. The dividend yield is 3%
Question:
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 1⁄2% 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? 0.5%
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?
Finite Mathematics and Its Applications
ISBN: 978-0134768632
12th edition
Authors: Larry J. Goldstein, David I. Schneider, Martha J. Siegel, Steven Hair