You are a U.S. investor considering investment in German (Stocks A and B) and British (Stocks C and D) stock markets. The world market index is estimated to yield a 10% dollar return. The current risk-free rates on the U.S. dollar, the Euro, and Pound are 4%, 3%, and 5% respectively. The euro is expected to appreciate against the dollar by 2%, while the pound depreciates by 2%. Your broker provides you with the following estimates. If you believe international CAPM and international parity relations are appropriate for your investment analysis, which stock would you recommend buying or selling? What may make your decision not so successful?

Stock	A	B	C	D
Country	Germany	Germany	U.K.	U.K.
Forecasted return (in local currency) World beta βw	0.07 1.5	0.09 0.90	0.11 1.2	0.12 0.8
Euro currency exposure	1	0.80	1.2	1.0
Pound currency exposure	–0.25	0.75	-1.0	0.5

Answer rating: 100% (QA)

Answer International CAPM tells us W1 currency exposure 05 Focusing on the four stocks in the backtest we get A 007 B 09 C 011 D 08 These betas are not statistically different from 1 for each of the s... View the full answer