Question

Assume that you invest in U.K. stocks. After one year, the domestic return on U.K. stock is 9.5% and the dollar has fallen by 4% against the U.K. pound. Your return in U.S. dollar terms is approximately

A.
13.5%

B.
5.5%

C.
9.5%

D.
8%

E.
4%

Answer 1

Explanation:

I think the question is faulty.

Suppose you have 1000 dollars invested in the UK financial instrument. It returns 9.5%. 9.5% of 1000 dollars is (9.5/100) * 1000 = 95 dollars. If you bring that 95 dollars back to the US, you get an additional 4% because of the exchange rate. (This assumes that the 95 is in British Pounds). So 4% of 95 is about 3.80 US dollars. That brings the total up to (98.80/1000)* 100% which is about 9.88%. No such answer exists.

The question is so unclear that a number of other answers are possible. But none are going to be as high as 13% or as low as 5.5% or even 8%.

Discussing the 8% is worth a bit of time. When you bring in the US dollars the pound conversion gives you an extra 4%. The amount of money will go up, not down.

13% is arguably right only if you repatriate the 1000 dollars, but the problem did not make clear that was what was happening.

I don't know what answer you should pick. 9.5% is the closest answer so it is perhaps what you should pick, but it is not correct.