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% for one year.What is the weighted annual return on the FI's portfolio assuming that the $100 million are 20% 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 annum (round to two decimals)?

Question

Quizplus · Accepted Answer

The weighted annual return is calculated by taking into account the proportion of each asset and its respective return. The euro investment is 20% of the total assets with an 11% return, and the Australian dollar investment is 80% of the total assets with an 8% return. The weighted return is (0.20 * 11%) + (0.80 * 8%) = 8.60% p.a.

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