CASE STUDY

INNOCENTS ABROAD: CURRENCIES AND INTERNATIONAL STOCK RETURNS

Why does Sandra Meyer believe that adding international stocks to a US stock portfolio would add value? Why does Henry Bosse think otherwise?

Based on Exhibit $1,$ which market looks the most attractive from a return perspective? Which market looks the least attractive from a risk perspective? What, if anything, could be misleading about this chart?

The following questions refer to the section "Building the Client Presentation" in the case file. They loosely follow the bullet points in that section $($though with more detail$).$ Use Excel for the calculations.

a$.$ First, convert the index values in local currencies to US dollars $($see Appendix A$).$ Note that exchange rates are quoted as foreign currency per dollar, i$.$e$.,100$ Japanese Yen would buy $1$ US dollar.

b$.$ Calculate the average monthly returns and the standard deviations for all country indexes in both local currency and US dollars for the entire sample. Annualize the statistics. Repeat for the two sub$-$periods $($before and after $2002).$ Present your results in a table $($or tables$)$ that allows for easy comparisons.

c$.$ Estimate the correlation matrix of the country index returns in both local currency and US dollars for the three time periods under consideration $($Tip: Check under the Data Analysis module in Excel$).$

d$.$ Calculate how much an investor would have earned if he or she had invested $$1$ in the US $($S&P $500),$ the Developed ex$-$US $($EAFE$),$ and the Emerging Market $($EM$)$ indexes in both local currency and US dollars from $1991$ to $2012($see Appendix B$).$

e$.$ Calculate the average monthly returns and the standard deviations of the US $($S&P $500),$ the Developed ex$-$US $($EAFE$),$ and the Emerging Market $($EM$)$ indexes $($see Appendix C$).$ Annualize the statistics. Calculate their respective Sharpe Ratios. The average risk$-$free rate was $3\%($annualized$)$ over the same time period.