Concept explainers
Now suppose the investor in Problem
a. Recalculate the dollar-denominated returns for each scenario.
b. What happens to the standard deviation of the dollar-denominated return?
Compare it to both its old value and the standard deviation of the pound-denominated return.
(a)
To calculate:
The rates of return in dollar-denominated in different scenarios including a forward sale by the investor of
Introduction:
The dollar-denominated return is the return earned by the U.S. investor by investing a particular amount in foreign currency.
Answer to Problem 5PS
Below table highlights the values:
Per share price (£) | Dollar-Denominated Return (%) |
£ |
|
£ |
|
£ |
Explanation of Solution
Given:
Let's calculate the dollar-denominated return and for that, the following formula is used:
By using the above formula, Dollar-denominated return is computed as follows:
Per share price (£) | Dollar-Denominated Return (%) |
(b)
To calculate:
Ascertain the standard deviation of the dollar-denominated return.
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
Answer to Problem 5PS
The standard deviation for the dollar-denominated return is
Explanation of Solution
Given:
The table showing outcomes:
Per share price (£) | Dollar-Denominated Return (%) |
£ |
|
£ |
|
£ |
For calculating the standard deviation, the following formula is to be used:
For computing standard deviation of dollar-denominated return, following calculation is needed:
Per share price (£) | Probability | Dollar-Denominated Return (%) | |
|
|
£ |
|
||||
£ |
|||||
£ |
|
||||
|
Variance computed as above is
Now, for standard deviation of dollar-denominated return at the rate of
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Chapter 19 Solutions
Essentials Of Investments
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