Assume that a domestic and foreign asset have standard deviations of d = 10% and f = 22%, respectively, with a correlation of df = 0.25. The risk-free rate is equal to 3% in both countries. The expected return on the domestic asset is 9% and 25% on the foreign asset.

i) Calculate the Sharpe ratios for the domestic asset, the foreign asset, and an internationally-diversified portfolio equally invested in the domestic and foreign assets. Critically discuss your findings. Provide your workings and full calculations, when answering this question. [7.5 marks]

ii) Assume now that the correlation is equal to 0.9. Calculate the Sharpe ratio for an internationally diversified portfolio equally invested in the domestic and foreign assets, and compare your answers to those in (i). Discuss your findings. Provide your workings and full calculations, when answering this question.