Problem:
A US company currently has domestic operations only. It is considering an equal-size investment in either Canada or Britain. The data on expected rate of return and the risk associated with each of these proposed investments are given below.
|
Proposed investment
|
Mean return
|
Standard deviation
|
|
British Investment
|
22%
|
10%
|
|
Canadian Investment
|
28%
|
15%
|
The mean return on the company's current, domestic only, business is 20% with a standard deviation of 15%. Using the above data and the correlation coefficients, the company calculated the following portfolio risk and return (based on a ratio of 50% US domestic operations and 50% international operations).
|
Proposed investment
|
Mean return
|
Standard deviation
|
|
US and Britain
|
21%
|
3%
|
|
US and Canada
|
24%
|
15%
|
The company plans to select the optimal combination of countries based on risk and return for the domestic and international investments taken together. Because the company is new to the international business environment, it is relatively risk averse. Based on the above data, which one of the following alternatives provides the best risk-adjusted return to the firm?
1. Undertake the British investment.
2. Undertake the Canadian investment.
3. Do not undertake either investment.
4. Unable to determine based on data given.