The realized dollar returns for a U.S.resident investing in a foreign market will depend on the return in the foreign market as well as on the exchange rate fluctuations between the dollar and the foreign currency. Calculate the variance of the monthly rate of return in dollar terms,if the variance of the foreign market's return (in terms of its own currency)is 1.14,the variance between the U.S.dollar and the foreign currency is 17.64,the covariance is 2.34,and the contribution of the cross-product term is 0.04.

Question

Quizplus · Accepted Answer

The formula for calculating the variance of the monthly rate of return in dollar terms is:

Variance of the return in dollar terms = Variance of the return in local currency + Variance of exchange rate + 2 × Covariance between local return and exchange rate + 2 × Cross-product term

Plugging in the given values, we get:

Variance of the return in dollar terms = 1.14 + 17.64 + 2 × 2.34 + 2 × 0.04
Variance of the return in dollar terms = 1.14 + 17.64 + 4.68 + 0.08
Variance of the return in dollar terms = 23.50

Therefore, the variance of the monthly rate of return in dollar terms is 23.50. The best choice is B.

The Realized Dollar Returns for a U