Assume That the Domestic and Foreign Assets Have Standard Deviations $\sigma$

question 15

Essay

Assume that the domestic and foreign assets have standard deviations of $\sigma$ _d =16% and $\sigma$ _f = 19%, respectively, with a correlation of $\rho$ _df = 0.6. The risk-free rate is equal to 5% in both countries.
a. The expected returns of the domestic and foreign assets are both equal to 10%, E(R_d) =E(R_f) = 10%. Calculate the Sharpe ratios for the domestic asset, the foreign asset, and an internationally- diversified portfolio equally invested in the domestic and foreign assets. What do you conclude?
b. Assume now that the expected return on the foreign asset is higher than on the domestic asset, E(R_d) = 10% but E(R_f) =12%. Calculate the Sharpe ratio for an internationally diversified portfolio equally invested in the domestic and foreign assets, and compare your findings to those in Question (a).

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