Final answer:
The statement is false because interest rate parity offsets differences in interest rates through corresponding changes in exchange rates. U.S. investors may profit from currency exchange movements if the British pound's value changes as expected.
Step-by-step explanation:
The statement 'U.S. investors will earn a lower return domestically than British investors earn domestically' under the condition that interest rate parity exists and given the specified interest rates in the U.S. and U.K., is false. Interest rate parity theory suggests that the difference in interest rates between two countries will be offset by changes in the exchange rates. If a U.S. investor believes that the British pound will increase in value, they could potentially make a profit from investing in British assets despite the lower interest rate in the U.S.
For instance, if a U.S. investor converts $24,000 to British pounds at a rate of $1.50 per pound, they will receive 16,000 pounds. If the pound increases its value to $1.60 as expected, the investor can convert back to $25,600, realizing a profit. Conversely, if they anticipate a depreciation in the pound's value, they could profit from the subsequent change in the exchange rate after conversion, as demonstrated in the example with an initial conversion of £20,000 to $30,000 and a re-conversion expecting a lower exchange rate.
Therefore, returns on international investments are not only a product of interest rates but also of anticipated changes in exchange rates. These portfolio investments can be profitable or result in losses depending on the accuracy of the future exchange rate forecast.