10. Brazilian Investors Diversify. The Brazilian econ- omy in 2001 and 2002 had gone up and down. The Brazilian reais (R$) had also been declining since 1999 (when it was floated). Investors wished to diver- sify internationally-into U.S. dollars for the most part to protect themselves against the domestic economy and currency. A large private investor had, in April 2002, invested R$500,000 in Standard & Poor's 500 Indexes, which are traded on the American Stock Exchange (AMSE: SPY). The begin- ning and ending index prices and exchange rates between the reais and the dollar were as follows:

a. What was the return on the index fund for the year to a U.S.-based investor?

b. What was the return to the Brazilian investor for the one year holding period? If the Brazilian investor could have invested locally in Brazil in an interest bearing account guaranteeing 12%, would that have been better than the American diversification strategy?