Suzuki is a Japanese Investor. He is considering investing in the stock of a US firm called Itech. The work risk premium is 6% and the sensitity of Itech to changes in the world index is 1.3. The only currency that itech is sensitive to is the USD, which has a foreign currency risk premium of 2%. The estimated sensitivity of Itech dollar drnominated returns to the US dollar is 0.8, The RFR is 3% in Japan and 5% in the US. If Suzuki uses the ICAPM, the required return on itech is what? (man that’s a long one to type) So putting everything into the ICAPM eqn gives you: E® = 3% + (1.3 x 6%) + (1.8 x 2%) The thing I don’t get it why do you use 1.8?? Where did this come from? Why is it not 0.8?? Cheers for any help.
suzuki has sensitivity of 0.8 to $ denominated returns. If you now need to convert to LC (which is Yen) it would be 1+0.8 = 1.8.
Ah gotcha… Thanks