Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 150. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be
A) 12.0%.
B) 12.5%.
C) 13.0%.
D) 15.5%.

Question

Quizplus · Accepted Answer

The expected return on the portfolio is calculated as the weighted average of the expected returns of the individual investments. Here, it's (0.5 * 18%) + (0.5 * 13%) = 9% + 6.5% = 15.5%.

Assume There Is a Fixed Exchange Rate Between the Canadian