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problem: Assume we $4,000,000 currently invested in the UNITED STATE with a return of 10%. We are considering two $1,000,000 mutually exclusive investments, one in the UNITED STATE and the other in the euro zone, each of which will return 12%. We will invest in one of the projects. The spot rate is €0.75/$, the interest rates are 5% in both the euro zone and the UNITED STATE, the standard deviations of the returns is 20% on the original ($4,000,000) investment, 45% on the proposed UNITED STATE investment and 40 percent on the proposed euro zone investment. The current investment has a 15 percent covariance with the UNITED STATE project, a 20% covariance with the euro zone project and the covariance between the new UNITED STATE and euro zone project is 30 percent. find out the expected returns, the variance [or standard deviation], select the project that will maximize shareholder price & describe why the project that was chosen is appropriate.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M919049

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