Which of the following statements regarding the hedge portfolio in the international asset pricing model is FALSE?
A) If inflation is a constant in each currency, then the hedge portfolio reduces to the investor's home-currency risk-free asset.
B) The hedge portfolio consists of domestic and foreign bonds.
C) The hedge portfolio serves as a store of value.
D) The hedge portfolio serves to hedge domestic inflation risk.
E) The hedge portfolio serves to hedge the currency risk of foreign assets.

Question

Quizplus · Accepted Answer

The hedge portfolio is designed to hedge against currency risk of foreign assets, not specifically to hedge domestic inflation risk. Its primary purpose is to mitigate the impact of currency fluctuations on the returns of international investments, rather than directly addressing inflation.

Which of the Following Statements Regarding the Hedge Portfolio in the International