Assume an FI sells $100 million for euros on the spot currency markets at an exchange rate of $1.20 to €1.00 and invests the euro assets at an interest rate of 11 per cent for one year. What is the weighted annual return on the FI's portfolio assuming that the $100 million are 20 per cent of the FI's total assets and that the remaining assets are invested in Australian dollar assets at an average interest rate of 8 per cent p.a. (round to two decimals)?

Question

Quizplus · Accepted Answer

The weighted annual return is calculated by taking the weighted average of the returns on the different assets. The euro investment is 20% of the total assets and earns 11%, while the remaining 80% is invested in Australian dollar assets earning 8%. The weighted return is (0.20 * 11%) + (0.80 * 8%) = 8.60%.

Assume an FI Sells $100 Million for Euros on the Spot