Question 2. (30 marks) Suppose that you are a UK investment analyst working on a short report on whether it is recommended for UK investors to shift asset allocation from a domestic (UK) fund to a foreign (US) fund. Assume that the UK risk-free rate of return is constantly at 0.5% per annum. The following chart provides the historical information of two mutual funds and the $/ exchange rate changes from 2016 to 2019: 2017 2018 Table 1 Year 2016 US Fund's Return in S 18% UK Fund's Return in -15% Depreciation rate of $ against -16% 2019 7% 25% 6% 10% -22% 21% -6% 18% 4% a) Discuss whether the following methodology is appropriate for converting the US fund's $-denominated returns to -denominated returns: "In 2016, the US dollar depreciated by -16% against the British pound, i.e., the US dollar appreciated by 16% against the British pound. A UK investor holding the US fund in 2016 not only gained from the 18% return in S but also benefited from the 16% appreciation of relative to the home currency (). Therefore, the UK investor's -denominated return is 18%+16%=34%." (10 marks) b) Write a short explanatory note for each of the following elements. Support your answers with calculation: i Quantitative analysis on the performance of the two funds in Table 1. Hint: You should use the Sharpe performance measure and the increase in return at the domestic-equivalent nisk level. (5 marks) li. Quantitative analysis on the impact of the exchange rate on the risk and return of the US fund from a UK investor's perspective. (10 marks) iii. The key limitations of the above analysis. (5 marks) Question 2. (30 marks) Suppose that you are a UK investment analyst working on a short report on whether it is recommended for UK investors to shift asset allocation from a domestic (UK) fund to a foreign (US) fund. Assume that the UK risk-free rate of return is constantly at 0.5% per annum. The following chart provides the historical information of two mutual funds and the $/ exchange rate changes from 2016 to 2019: 2017 2018 Table 1 Year 2016 US Fund's Return in S 18% UK Fund's Return in -15% Depreciation rate of $ against -16% 2019 7% 25% 6% 10% -22% 21% -6% 18% 4% a) Discuss whether the following methodology is appropriate for converting the US fund's $-denominated returns to -denominated returns: "In 2016, the US dollar depreciated by -16% against the British pound, i.e., the US dollar appreciated by 16% against the British pound. A UK investor holding the US fund in 2016 not only gained from the 18% return in S but also benefited from the 16% appreciation of relative to the home currency (). Therefore, the UK investor's -denominated return is 18%+16%=34%." (10 marks) b) Write a short explanatory note for each of the following elements. Support your answers with calculation: i Quantitative analysis on the performance of the two funds in Table 1. Hint: You should use the Sharpe performance measure and the increase in return at the domestic-equivalent nisk level. (5 marks) li. Quantitative analysis on the impact of the exchange rate on the risk and return of the US fund from a UK investor's perspective. (10 marks) iii. The key limitations of the above analysis