One-Year Investment Horizon Assumption
To simplify the analysis of a global investor's decision, a one-year investment horizon is assumed. This means the investor evaluates returns and makes choices based on a one-year timeframe.
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Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
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One-Year Investment Horizon Assumption
Home Policy Rate (i)
Numerical Example of US and South African Policy Rates
Investor's Focus on Home Currency Rate of Return
Numerical Example of Expected Currency Depreciation (δ^E = 2.5%)
Risk of Currency Depreciation Offsetting High Interest Rates
Analytical Framework: Defining Home and Foreign Economies in the Investment Example
A manager of a US-based fund, whose obligations are in US dollars, is evaluating three one-year bond investment options to maximize the fund's return in US dollars. The options are:
- A US government bond with a guaranteed 3% annual return.
- A bond from Country A offering an 8% annual return in its local currency, which is expected to depreciate by 6% against the US dollar over the year.
- A bond from Country B offering a 4% annual return in its local currency, which is expected to appreciate by 2.5% against the US dollar over the year.
Based on the goal of maximizing the expected return in US dollars, which investment should the manager choose?
Foreign Bond Investment Analysis
Foreign Investment Decision Analysis
A US-based investment fund, which measures its returns in US dollars, is considering two one-year investment options. Option A is a US Treasury bond with a 4% annual yield. Option B is a South African government bond with a 7% annual yield, denominated in South African rand. Financial analysts predict that the South African rand will depreciate by 5% against the US dollar over the next year. Given this information, the South African bond is the more profitable investment for the fund.
Learn After
Evaluating an Investment Model's Suitability
When an economic model simplifies an investor's decision-making process by assuming a one-year investment horizon, what is the primary analytical purpose of this assumption?
Critique of a Simplifying Assumption in Investment Models
An analyst is using an economic model that simplifies an investor's decision to a one-year timeframe. According to this model's core simplification, the investor's primary concern would be the long-term (e.g., 5-10 year) stability of a foreign currency rather than its expected value in the next twelve months.
An economic model is used to analyze a US-based investor's decision between purchasing a one-year US government bond and a one-year German government bond. The model simplifies the analysis by assuming the investor only considers the returns over this single year. Based on this simplifying assumption, which pair of factors is essential for the investor to calculate and compare the expected return of the German bond in US dollars?
International Bond Investment Decision
To simplify the complex analysis of a global investor's decision-making process, economic models often assume a specific, limited timeframe for evaluating returns. This is commonly referred to as the ____ investment horizon assumption.
An economic model simplifies an investor's decision to a one-year timeframe. A US investor is using this model to compare a one-year US bond with a 3% interest rate to a one-year German bond with a 2% interest rate. To maximize their return in US dollars, under which of the following circumstances should the investor choose the German bond?
An economic model simplifies an investor's decision to a one-year timeframe. A US-based investor is using this model to decide whether to buy a one-year bond from the United Kingdom. Arrange the following analytical steps in the logical order the investor would follow to determine the expected return of the UK bond in US dollars and make a decision.
An economic model simplifies an investor's decision-making process by assuming a one-year investment horizon. For a US-based investor using this model, match each foreign investment scenario with the primary factor that would determine whether the foreign investment yields a higher return than a comparable US investment.