Assume There Is a Fixed Exchange Rate Between the Euro

question 34

Multiple Choice

Assume there is a fixed exchange rate between the Euro and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 16% and 13%, respectively. The expected return and standard deviation on the DAX stock market are 11% and 18%, respectively. The covariance of returns between the U.S. and German stock market is 1.5%.
If you invested 50% of your money in the German (DAX) stock market and 50% in the U.S. stock market, the expected return on your portfolio would be

• A) 12.0%.
• B) 12.5%.
• C) 13.0%.
• D) 13.5%.

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