Accounts & Finance

"To calculate the expected equity-market return premium, we need to subtract the risk-free rate from the expected market return, which gives us the expected equity-market return premium.

Assuming the risk-free rate is 2%, the expected market returns and equity-market return premiums for the three countries are:

Country A: Expected market return = 10%, Equity-market return premium = 8%

Country B: Expected market return = 12%, Equity-market return premium = 10%

Country C: Expected market return = 8%, Equity-market return premium = 6%

Therefore, the ranking of the three countries in terms of expected equity-market return premiums is:

Country B

Country A

Country C

To calculate the expected currency return premiums, we need to subtract the U.S. risk-free rate from the expected foreign risk-free rate, and add the expected exchange rate change. Assuming the U.S. risk-free rate is 2%, the expected foreign risk-free rates, exchange rate changes, and currency return premiums for the three countries are:

Country A: Expected foreign risk-free rate = 5%, Expected exchange rate change = -2%, Currency return premium = 1%

Country B: Expected foreign risk-free rate = 4%, Expected exchange rate change = 3%, Currency return premium = 5%

Country C: Expected foreign risk-free rate = 6%, Expected exchange rate change = -1%, Currency return premium = 3%

Therefore, the ranking of the three countries in terms of expected currency return premiums from the perspective of a U.S. investor is:

Country B

Country C

Country A"