You are a U.S. investor considering investing in Switzerland. The world market risk premium is estimated at

Question:

You are a U.S. investor considering investing in Switzerland. The world market risk premium is estimated at 5 percent, the Swiss franc offers a 1 percent risk premium, and the current risk-free rates are equal to 4 percent in dollars and 3 percent in francs. In other words, you expect the Swiss franc to appreciate against the dollar by an amount equal to the interest rate differential plus the currency risk premium, or a total of 2 percent. You believe that the following equilibrium model (ICAPM) is appropriate for your investment analysis:
E(R,) = Rf + Î²1, Ã— RPW + Î²2 Ã— RPSFr,
where all returns are measured in dollars, RPW is the risk premium on the world index, and RPsFr is the risk premium on the Swiss franc. Your provides you with the following estimates and forecasted returns.

a. What should be the expected dollar returns on the four stocks, according to the ICAPM?
b. Which stocks would you recommend buying or selling?

Stocks
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