International Financial Management 6th Edition by Sanjiv Eun, Cheol Resnick, Bruce Sabherwal

Exercise 12

Rebecca Taylor, an international equity portfolio manager, recognizes that optimal country allocation strategy combined with an optimal currency strategy should produce optimal portfolio performance. To develop her strategy, Taylor produced the table below, which provides expected return data for the three countries and three currencies in which she may invest. The table contains the information she needs to make market strategy (country allocation) decisions and currency strategy (currency allocation) decisions.
Expected Returns for a U.S.-Based Investor a. Prepare a ranking of the three countries in terms of expected equity-market return premiums. Show your calculations.
b. Prepare a ranking of the three countries in terms of expected currency return premiums from the perspective of a U.S. investor. Show your calculations.
c. Explain one advantage a portfolio manager obtains, in formulating a global investment strategy, by calculating both expected market premiums and expected currency premiums.