2. Correlation in Global Investing (beginner). The standard deviation of Infosys in Indian rupees (INR) is I
Question:
2. Correlation in Global Investing (beginner). The standard deviation of Infosys in Indian rupees (INR) is σI = 8.5 percent, and the standard deviation of the US$/INR exchange rate is σs = 5.5 percent.
a. If the correlation between Infosys’s asset return, in INR, and the exchange rate movement is ρ = 0, calculate the amount of risk that can be attributed to currency risk.
b. If the correlation between Infosys’s asset return, in INR, and the exchange rate movement is ρ = 0.25, calculate the amount of risk that can be attributed to currency risk.
c. If the correlation between Infosys’s asset return, in INR, and the exchange rate movement is ρ = –0.25, calculate the amount of risk that can be attributed to currency risk.
d. What can you conclude from these cases about the impact of the level of correlation between the asset return in local currency and the exchange rate movement on the risk of a foreign asset measured in dollars?
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