Assume that the domestic volatility (standard deviation in yen) of the Japanese stock market is 18%. The volatility of the yen against the U.S. dollar is 6%.

1. What would the dollar volatility of the Japanese stock market be for a U.S. investor if the correlation between the Japanese stock market returns and exchange rate movements were zero? (5 points)

2. Suppose the dollar volatility of the Japanese stock market is 18.4%, what can you conclude about the correlation between the Japanese stock market movements and exchange rate movements? (5 points)