A U.S. investor in a stock traded only in Italy earns 8% on the stock and loses 10% on the lira. His actual total return is

Question

Quizplus · Accepted Answer

The actual total return can be calculated by considering both the return on the stock and the effect of the currency exchange rate. The formula for the combined effect is (1 + return on stock) * (1 + return on currency) - 1. Plugging in the given values: (1 + 0.08) * (1 - 0.10) - 1 = 1.08 * 0.90 - 1 = 0.972 - 1 = -0.028 or -2.8%.

A US Investor in a Stock Traded Only in Italy Earns