Q1. If a U.S.-based investor purchases a euro-denominated ETF and the euro subsequently depreciates in value relative to the dollar, the investor will have a total return that is: A lower than the ETF’s total return. B higher than the ETF’s total return. C the same as the ETF’s total return. Q2 Which of the following is incorrect about the risk of an equity security? The risk of an equity security is: A. Based on the uncertainty of its cash flows. B. Based on the uncertainty of its future price. C. Measured using the standard deviation of its dividends.
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A (accounting for currency translation losses)
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C
I would think the answers are A and C.
- If the euro depreciates in value relative to he will lose additional money converting back to (ie. he will need to spend more euro’s to purchase 1 dollar)
- I’ve never seen C) described as a risk for equity securities, and doesn’t make intuitive sense to me, but A) and B) seem logical, so I’d go with C)
Q1. Would not the return be same as that for ETF, because the ETF’s euro denominated return will also have to be converted into dollars?? Or is it that this is always in Euros, and depending about the specific exchange rates, the returns vary eg. an Indian might have invested, and then he will have to convert in rupees?
Q2. Returns from equity security are in the form of price return (fluctuation in price), dividends, and foreign exchange differences. And the risk of an equity security is the standard deviation of returns. so, how come C is incorrect?