Question: QUESTION 22 What are the problems associated with using econometric models for forecasting exchange rates? QUESTION 23 An asset has a beta of 1.20. The

QUESTION 22

What are the problems associated with using econometric models for forecasting exchange rates?

QUESTION 23

An asset has a beta of 1.20. The variance of returns on a market index, _m², is 256. If the variance of returns for the asset is 400, what proportion of the asset's total risk is systematic, and what proportion is residual risk? Show your work below.

QUESTION 24

The interest rate on one-year risk-free bonds is 5% in the U.K., and 3.75% in Switzerland. The current exchange rate is 0.5 per SF. Suppose that you are a British investor and you expect the Swiss franc to appreciate by 2% over the next year. Calculate the foreign currency risk premium. Express your answers as a decimal (nearest 1/10000 decimal points). Show your work below.

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