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An English institutional investor has invested in a portfolio of stocks in Russia. The annual inflation...

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Finance

An English institutional investor has invested in a portfolio ofstocks in Russia. The annual inflation rate is 6 percent in Russiaand 2.5 percent in the England.

Suppose that the annual return on the portfolio is 12 percent inRussian rubles, and the Russian ruble depreciated with respect tothe pound by 5 percent. Also suppose that a Russian institutionalinvestor also held a portfolio with the same composition. Comparethe real returns for both investors, and discuss why they do or donot differ from one another.

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Answer 1 First calculating real return for English institutional investor There is a 12 return in Russian rubles which is notional return To calculate Notional return for English investors we must incorporate currency exchange depreciation in return as Russian rubles is weaker than a pound at year end This means    See Answer
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Transcribed Image Text

An English institutional investor has invested in a portfolio ofstocks in Russia. The annual inflation rate is 6 percent in Russiaand 2.5 percent in the England.Suppose that the annual return on the portfolio is 12 percent inRussian rubles, and the Russian ruble depreciated with respect tothe pound by 5 percent. Also suppose that a Russian institutionalinvestor also held a portfolio with the same composition. Comparethe real returns for both investors, and discuss why they do or donot differ from one another.

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