Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50 percent of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8 percent. The Trinidad one-year interest rate is 10 percent, and the Japanese one-year interest rate is 7 percent. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:

-Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?

Question

Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50 percent of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8 percent. The Trinidad one-year interest rate is 10 percent, and the Japanese one-year interest rate is 7 percent. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:
​ 
-Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?​

Quizplus · Accepted Answer

To calculate the expected effective yield, we must first calculate the expected return on the Trinidad dollar and Japanese yen investments separately using the information given in the exhibit:
Expected return on Trinidad dollar investment = (0.5 x 10%) + (0.5 x (-2%)) = 4%
Expected return on Japanese yen investment = (0.5 x 7%) + (0.5 x 11%) = 9%

Next, we can calculate the expected effective yield of the portfolio using the formula:
(Weight of Trinidad dollar investment x expected return on Trinidad dollar investment) + (Weight of Japanese yen investment x expected return on Japanese yen investment)
= (0.5 x 4%) + (0.5 x 9%)
= 6.5%

Therefore, the expected effective yield of the portfolio Sciorra is contemplating is 6.5%, which is closest to answer choice B (8.84% is not a possible answer based on the calculations).

Exhibit 21-1 To Benefit from the Low Correlation Between the Trinidad Dollar