Question

Suppose the expected return for Brazil is 12%, the risk free rate in Brazil and New Zealand is 4%, the correlation between New Zealand and Brazil equity returns is 0.35, the Brazil Sharpe Ratio is 0.22 and the volatility of equity return in New Zealand is 0.25, then the hurdle rate for New Zealand is __________.

a. 5.93%

b. 5.2%

c. 13.2%

d. 1.93%

Answer 1

Answer is a. 5.93%.

hurdle rate for New Zealand = Risk-free rate + correlation between New Zealand and Brazil equity returns*Brazil Sharpe Ratio*volatility of equity return in New Zealand

hurdle rate for New Zealand = 0.04 + 0.35*0.22*0.25 = 0.0593 or 5.93%