QUESTION 13

Paf is a small country. Its currency is the pif and the exchange rate with the U.S. dollar is 2 pifs per dollar in 1980. The inflation indexes in 1980 are equal to 110 in the United States and in Paf. Twenty years later, the inflation indexes are equal to 450 in the United States and 230 in Paf. The current exchange rate is 0.9 pifs per dollar. What should the current exchange rate be if PPP prevailed?

QUESTION 14

Refer to the previous question. Is the Pif over/undervalued according to PPP?

QUESTION 15

Consider an asset that has a beta of 0.80. If the risk free rate is 5.5% and the market risk premium is 4%, calculate the expected return on the asset. Write your answers as a decimal (to the nearest 1/10000 decimal points).