Explain why it might still be more efficient on a risk/reward basis to invest internationally rather than only domestically in the long run.

The HFS Trustees have decided to invest in non-U.S. equity markets and have hired Jacob Hind, a specialist manager, to implement this decision. He has rec- ommended that an unhedged equities position be taken in Japan, providing the following comment and the table data to support his views:

Appreciation of a foreign currency increases the returns to a U.S. dollar inves- tor. Since appreciation of the Yen from 100/$U.S. to 98/$U.S. is expected, the Japanese stock position should not be hedged. Market Rates and Hinds Expectations Spot rate (yen per $U.S.) Hinds 12-month currency forecast (yen per $U.S.) 1-year Eurocurrency rate (% per annum) Hinds 1-year inflation forecast (% per annum) U.S. Japan n/a 100 n/a 98 6.00 0.80 3.00 0.50 Assume that the investment horizon is one year and that there are no costs asso- ciated with currency hedging.

ciated with currency hedging