A portfolio manager is considering the benefits of increasing her diversification by investing overseas. She can purchase shares in individual country funds with the expected return (ER), standard deviation (STD) and correlations (CORR) characteristic provided above.

1. What are the expected returns and standard deviations of returns of US&UK portfolios with different mixes such as 100% invested in US, 0% in UK; 90% invested in US, 10% in UK; 80% invested in US, 20% in UK;; 10% invested in US, 90% in UK; 0% invested in US, 100% in UK? Replace ?s with the right info at the above table with the help of Excel formulas.

2. What are the expected returns and standard deviations of returns of US & Spain portfolios with different mixes such as 100% invested in US, 0% in Spain; 90% invested in US, 10% in Spain; 80% invested in US, 20% in Spain;; 10% invested in US, 90% in Spain; 0% invested in US, 100% in Spain? Replace *s with the right info at the above table with the help of Excel formulas.

3. Plot these two sets of risk-return combinations as in the case at the back (one for US&UK and another for US & Spain portfolio).

4. Which combination leads to a better risk and return (the most efficient) choice from a US investor perspective [answer by calculating the changes (CHG) in ER (return improvement), STD (risk reduction) and CV (coefficient of variation return per unit of risk) and by replacing @s]. From UK investor perspective (replace #s)? From Spanish investor perspective (replace !s). Explain your answers.

5. What is the beta of the British market from a U.S. perspective? What is the beta of the Spanish market from a U.S. perspective?

6. Assume that the British pound is expected to appreciate by %5 against dollar by the end of the year. What would the expected percentage dollar return be if the US investor invested in the most efficient US & UK portfolio?

7. Assume that euro is expected to depreciate by %3 against dollar by the end of the year. What would the expected percentage dollar return be if the US investor invested in the most efficient US & Spanish portfolio?

Uk STD Is 8%

Spain ER is 10%

Spain STD is 5%

Show Excel Formulas/Explanations Please

IS UK SPAIN ER 15% 1296 59 STD 109 996 1 0.33 0.05 ; 2 CORR 2 Weights WI W2 US&UK ER 70% 100% 90% 30% 096 10% 20% ? ? 50% 50% 40% 40% 50% 50% 30% 20% 10% 0% 70% 80% 90% 100% 30% ? 2 2 > > > STD 2 2 . 2 2 > 2 ? US8SPA ER STO DIVERSIFICATION BENEFITS FOR USINVESTOR WITH UK & SPA CV=RETURN PER RETURN RISK RISK ER EReer CHS STD STDeer CHG CVs Cees OHG UK 159 10% 150 SPA 159 1095 @ 150 DIVERSIFICATION BENEFITS FORUKINVESTOR WITH US CV=RETURN PER RETURN RISK ERUK Roer OHG STOU STDoor dhe cuek voor OHG = 1333 RISK DIVERSIFICATION BENEFITS FOR SPANISHINVESTOR WITH US RETURN RISK RETURN PER RISK ERSA ER CHC STOP STOper CHG CV CVoor CHG 1.25