Assume there is a fixed exchange rate between the Euro and U.S. dollar. The expected return and standard deviation of return on
the U.S. stock market are 16% and 13%, respectively. The expected return and standard deviation on the DAX stock market are 11% and 18%, respectively. The covariance of returns between the U.S. and German stock market is 1.5%. If you invested 50% of your money in the German (DAX) stock market and 50% in the U.S. stock market, the expected return on your portfolio would be
1 answer:
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Answer:
The correct answer is option C.
Explanation:
Italy and Sweden both produce jeans and stained glass.
Italy's opportunity cost of producing a pane of stained glass
= 4 pairs of jeans
Sweden's opportunity cost of producing a pane of stained glass
= 10 pairs of jeans
Since Italy has a lower opportunity cost of producing glass, so we can say that it has a comparative advantage in the production of glass.
Italy's opportunity cost of producing a pair of jeans
=
= 0.25
Sweden's opportunity cost of producing a pair of jeans
=
= 0.1
Sweden has a lower opportunity cost in the production of jeans, so it has a comparative advantage in the production of jeans.
So, Italy will produce and export glass and Sweden will produce and export jeans.
Both the countries will gain from trade if the trade price lies between their opportunity cost.
So the trade price will be 8 pairs of jeans per pane of stained glass.