Investments, tenth edition

   SOLUTIONS TO CONCEPT CHECKS 

    1.  1  1   r (US)  5  [1  1   r  

 f  

 (UK)]  3  ( E  

1

 / E  

0

 )

     a.   1  1   r  (US)  5  1.1  3  1.0  5  1.10.  Therefore,   r  (US)  5  10%.  

    b.   1  1   r  (US)  5  1.1  3  1.1  5  1.21.  Therefore,   r  (US)  5  21%.     

bod61671_ch25_882-925.indd   924

bod61671_ch25_882-925.indd   924

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7/25/13   2:04 AM

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  C H A P T E R  

2 5

  International Diversification  

925

   2.  You must sell forward the number of pounds you will end up with at the end of the year. This value 

cannot be known with certainty, however, unless the rate of return of the pound-denominated 

investment is known.

     a.   10,000  3  1.20  5  12,000  pounds.  

    b.   10,000  3  1.30  5  13,000  pounds.     

   3.   Country selection:    

(0.40

3 10%) 1 (0.20 3 5%) 1 (0.40 3 15%) 5 11%  

     This is a loss of 1.5% (11% versus 12.5%) relative to the EAFE passive benchmark. 

      Currency selection:    

(0.40

3 10%) 1 (0.20 3 (210%)) 1 (0.40 3 30%) 5 14%  

     This is a loss of 6% (14% versus 20%) relative to the EAFE benchmark.           

bod61671_ch25_882-925.indd   925

bod61671_ch25_882-925.indd   925

7/25/13   2:04 AM

7/25/13   2:04 AM

Final PDF to printer

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