Question 3 (15 points) You have landed a coveted internship at a prestigious money manager in Singapore. For your first assignment your supervisor has asked you to do the calculations needed to convince a valued client on the benefits of international diversification. You have been assigned this task instead of the other intern, because of your impeccable understanding of the principles of finance, especially that of diversification and the role that of currencies play in international investments. The data given to you in the following table on the next page and the CSV file) contains the average monthly returns and standard deviations for the S&P 500 index (in USD) and, EAFE index (in Local currency and USD) for the period 1991 to 2012. The correlation between S&P 500 and the EAFE (Local currency) over the entire period is 0.7927 (for local currency). The correlation between S&P 500 and the EAFE (USD) over the entire period is 0.7805. You are asked to present three computations: (a) The currency effect of investing in these market indices over the entire period. (5 points) (b) Risk and performance of the indices over the entire period. (5 points) (c) Graphically depict the benefits the investor derives from investing in these market indices (S&P 500 and EAFE) assuming both are denominated in USD. You should show your workings. (5 points) Formatting suggestion: This graph may be generated using a spreadsheet program or other software. If you hand-draw the graph, take a picture of the graph and insert the gif/jpeg file into your submission document before converting it into a PDF file. Question 3: Table. EAFE S&P 500 (Local Currency) EAFE (USD) MEAN STD MEAN STD MEAN STD 1991 2.33% 4.56% 0.82% 4.61% 1.12% 5.34% 1992 0.63% 2.15% -0.45% 3.37% -0.96% 4.21% 1993 0.82% 1.75% 2.27% 4.51% 2.52% 5.15% 1994 0.15% 3.05% -0.09% 3.50% 0.71% 3.76% 1995 2.70% 1.50% 0.84% 3.42% 0.98% 3.69% 1996 1.78% 3.14% 0.96% 2.86% 0.54% 2.09% 1997 2.52% 4.60% 1.19% 4.73% 0.27% 4.65% 1998 2.30% 6.21% 1.17% 6.03% 1.71% 5.67% 1999 1.67% 3.78% 2.51% 3.59% 2.09% 3.65% 2000 -0.68% 4.95% -0.57% 2.92% -1.17% 3.92% 2001 -0.90% 5.73% -1.33% 4.98% -1.85% 4.94% 2002 -1.90% 5.96% -2.31% 5.69% -1.27% 5.48% 2003 2.17% 3.29% 1.66% 3.97% 2.87% 4.22% 2004 0.88% 2.11% 1.04% 1.67% 1.61% 2.73% 2005 0.42% 2.29% 2.22% 2.78% 1.14% 2.89% 2006 1.24% 1.63% 1.34% 2.61% 2.04% 2.70% 2007 0.48% 2.79% 0.35% 2.49% 0.96% 2.79% 2008 -3.60% 6.07% -3.94% 6.76% -4.28% 7.83% 2009 2.17% 6.43% 2.04% 5.60% 2.62% 7.43% 2010 1.32% 5.56% 0.52% 4.37% 0.86% 6.62% 2011 0.27% 4.60% -0.97% 3.85% -0.89% 5.64% 2012 1.29% 3.04% 1.44% 3.56% 1.49% 4.79% MEAN: average monthly returns; STD: standard deviation of monthly returns Question 3 (15 points) You have landed a coveted internship at a prestigious money manager in Singapore. For your first assignment your supervisor has asked you to do the calculations needed to convince a valued client on the benefits of international diversification. You have been assigned this task instead of the other intern, because of your impeccable understanding of the principles of finance, especially that of diversification and the role that of currencies play in international investments. The data given to you in the following table on the next page and the CSV file) contains the average monthly returns and standard deviations for the S&P 500 index (in USD) and, EAFE index (in Local currency and USD) for the period 1991 to 2012. The correlation between S&P 500 and the EAFE (Local currency) over the entire period is 0.7927 (for local currency). The correlation between S&P 500 and the EAFE (USD) over the entire period is 0.7805. You are asked to present three computations: (a) The currency effect of investing in these market indices over the entire period. (5 points) (b) Risk and performance of the indices over the entire period. (5 points) (c) Graphically depict the benefits the investor derives from investing in these market indices (S&P 500 and EAFE) assuming both are denominated in USD. You should show your workings. (5 points) Formatting suggestion: This graph may be generated using a spreadsheet program or other software. If you hand-draw the graph, take a picture of the graph and insert the gif/jpeg file into your submission document before converting it into a PDF file. Question 3: Table. EAFE S&P 500 (Local Currency) EAFE (USD) MEAN STD MEAN STD MEAN STD 1991 2.33% 4.56% 0.82% 4.61% 1.12% 5.34% 1992 0.63% 2.15% -0.45% 3.37% -0.96% 4.21% 1993 0.82% 1.75% 2.27% 4.51% 2.52% 5.15% 1994 0.15% 3.05% -0.09% 3.50% 0.71% 3.76% 1995 2.70% 1.50% 0.84% 3.42% 0.98% 3.69% 1996 1.78% 3.14% 0.96% 2.86% 0.54% 2.09% 1997 2.52% 4.60% 1.19% 4.73% 0.27% 4.65% 1998 2.30% 6.21% 1.17% 6.03% 1.71% 5.67% 1999 1.67% 3.78% 2.51% 3.59% 2.09% 3.65% 2000 -0.68% 4.95% -0.57% 2.92% -1.17% 3.92% 2001 -0.90% 5.73% -1.33% 4.98% -1.85% 4.94% 2002 -1.90% 5.96% -2.31% 5.69% -1.27% 5.48% 2003 2.17% 3.29% 1.66% 3.97% 2.87% 4.22% 2004 0.88% 2.11% 1.04% 1.67% 1.61% 2.73% 2005 0.42% 2.29% 2.22% 2.78% 1.14% 2.89% 2006 1.24% 1.63% 1.34% 2.61% 2.04% 2.70% 2007 0.48% 2.79% 0.35% 2.49% 0.96% 2.79% 2008 -3.60% 6.07% -3.94% 6.76% -4.28% 7.83% 2009 2.17% 6.43% 2.04% 5.60% 2.62% 7.43% 2010 1.32% 5.56% 0.52% 4.37% 0.86% 6.62% 2011 0.27% 4.60% -0.97% 3.85% -0.89% 5.64% 2012 1.29% 3.04% 1.44% 3.56% 1.49% 4.79% MEAN: average monthly returns; STD: standard deviation of monthly returns