The Japanese Stock Market Has a Sigma of 18%, When

question 8

Essay

The Japanese stock market has a sigma of 18%, when computed in yen. The U.S. stock market has a sigma of 17% in US$ and the US$/¥ exchange rate has a sigma of 6%. The correlation between the Japanese stock market and $/¥ currency movements is -0.1; in other words, the Japanese stock market tends to go up when the yen goes down. The correlation between the Japanese and U.S.
stock markets is equal to 0.4, measured either in local currency of in dollars.
a. What is the sigma of the Japanese market when expressed in dollars?
b. Using this number, calculate the sigma, in dollars, of a portfolio made up of 50% of Japanese stocks and 50% of U.S. stocks.

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Definitions:

Gain-Sharing

A plan that allows employees to share in cost savings or productivity gains realized by their efforts.

Net Profits

The financial gain attained by a business after subtracting all operating expenses, interest, taxes, and any other necessary expenditures from its total revenue.

Fringe Benefits

Fringe benefits are additional advantages or compensations provided to employees on top of their regular salary, such as health insurance, paid vacations, and retirement plans.

Employee Assistance Programs

Employee Assistance Programs are workplace initiatives designed to help employees deal with personal problems that might adversely impact their work performance, health, and well-being.