Background: http://imgur.com/SxMTw9l Specific Question: http://imgur.com/BvUksRZ
When I attempted this question, I got the right answer, but not exactly, and it’s because I left out a piece of it. Given that there was no asset risk in the foreign currency itself (0% St. Dev.), the way to calculate st. dev. of the portfolio in my opinion was to only focus on currency risk. The answer does this too, however multiplies the currency’s standard deviation by the expected return (+1).
Why do we multiply by the expected return? Is it to account for the fact that we will have earnings, which will then create risk (or at least volatility in this context) that we want to measure?