UNIVERSITY OF MASSACHUSETTS BOSTON SCHOOL OF MANAGEMENT MBA AF622 Prof. Konan Global Portfolio Investments Management Homework 7 TOTAL = 40 POINTS 1. The interest rate on one-year risk-free bonds is 3.25 percent in the United States and 2.50 percent in Switzerland. The current exchange rate is $0.68 per Swiss franc. Suppose that you are a U.S. investor and you expect the Swiss franc to depreciate by 1.75 percent over the next year. a. Calculate the foreign currency risk premium. b. Calculate the domestic currency return on the foreign bond, assuming that your currency appreciation expectations are met. 2. Assume you are a U.S. investor who is considering investments in the French (Stocks A and B) and Swiss (Stocks C and D) stock markets. The world market risk premium is 4 percent. The currency risk premium on the Swiss franc is 1.75 percent, and the currency risk premium on the euro is 2.5 percent. The interest rate on one-year risk-free bonds is 2.75 percent in the United States. In addition, you are provided with the following information: Stock A B C D Country France France Switzerland Switzerland Bm 0.90 1 1.4 YE 0.80 -0.40 -1.0 YSFr -0.30 0.75 1.0 -0.4 a. Calculate the expected return for each of the stocks. The U.S. dollar is the base currency. b. Explain the differences in the expected returns of the four stocks in terms of m. Ve, and YSFr. LATE SURMISSION WILL