Suppose that you invested £1,000,000 in England last year, and the value of your investment increased to £1,100,000 this year……..

Suppose that you invested £1,000,000 in England last year, and the value of your investment increased to £1,100,000 this year. At the same time, BP has depreciated from $1.75/£ to $1.55/£. 

a. What is the poundreturn (percent) on this investment from the last year to this year?

b. What is the dollar return (percent) on this investment from the last year to this year?

 Explain:-

1. Explain the concepts of a factor model presented in equation:

r_j = m_j + b_1jF₁ + b_2jF₂ + b_3jF₃ + b_4jF₄ + e_j

1. Explain why this model has advantages to estimate the asset return rj over a market model: 

 r_j = a_j + b_jr_M + e_j

1. If you add one more factor to estimate the return of a foreign asset, which variable you should add to equation

 r_j = m_j + b_1jF₁ + b_2jF₂ + b_3jF₃ + b_4jF₄ + e_j. Explain why.