Question

An investor in Toronto is considering a new equity investment. She is considering investing overseas, but is not sure if it will be worth the added exchange rate risk. After reading several forecasts for both the expected equity returns and the expected exchange rate changes, she develops the table given below.

Expected Returns for a Canadian-Based Investor

Country Local Currency Equity Returns Exchange Rate Returns Exchange Rate Returns

Japan 10% 1.3%

United Kingdom 13.5% -2.0%

United States 11.4% 0



Based on the expected local currency equity returns only, which country looks like the best investment opportunity?

Answer 1

Considering only the expected local currency equity returns, the United Kingdom offers the best investment opportunity at a 13.5% return, higher than that of Japan's 10% and the United States' 11.4%.

Step-by-step explanation:

When assessing equity investment opportunities overseas, one important factor for investors to consider is the expected return in local currency terms, without factoring in exchange rate fluctuations. The question provided gives three different countries with their corresponding expected local currency equity returns. These are 10% for Japan, 13.5% for the United Kingdom (UK), and 11.4% for the United States (US). If we evaluate these investments based solely on the expected equity returns and disregard potential gains or losses from exchange rate changes, the UK appears to provide the highest expected return at 13.5%, making it the most attractive investment opportunity amongst the options provided. Therefore, based on the expected local currency equity returns alone, the best investment opportunity would be in the United Kingdom.