Ox Investment is an international asset manager from Australia. The fund invested significantly inthe Japanese equity market over the last two years. The exchange rate was Yen120/AUD two yearsago. The Nikkei Index has performed well relatively from 15000 to 16000 points. At the same time,the ASX200 stock market has increased from 5000 to nearly 7000 points. The current exchange rateis Yen140/AUD.A) Compute the rate of return on the investment in AUD terms. Show all the workings.(3 marks)B) Ox Investment’s investors were disappointed with the fund's performance in the Japanesemarket, as it lags far behind that of the Australian market. They comment: “You shouldfocus on identifying profitable domestic investments rather than venturing out to Japanesemarkets. Additionally, Yen is always negatively correlated with the global equity markets.The poor performance in the Japanese investments clearly shows that you don’t understandthis basic fact.” Evaluate the comment. Hint: You should consider the return and risk ininvesting in Japanese assets. (4 marks)

A) To compute the rate of return on the investment in AUD terms, we need to consider both the change in the Nikkei Index and the change in the exchange rate.

Step 1: Calculate the return on the Nikkei Index. The index increased from 15000 to 16000 points, which is a return of (16000-15000)/15000 = 6.67%.

Step 2: Calculate the change in the exchange rate. The exchange rate went from Yen120/AUD to Yen140/AUD, which is a change of (140-120)/120 = 16.67%.

Step 3: Combine these two changes to get the total return in AUD terms. The total return is 1.0667 * 1.1667 - 1 = 24.44%.

B) The investors' comment seems to be based on the assumption that the Japanese market always performs worse than the Australian market, and that the Yen is always negatively correlated with global equity markets. However, this is not necessarily the case. While the Japanese market may have underperformed the Australian market in this particular period, there may be other periods where it outperforms. Similarly, while the Yen may be negatively correlated with global equity markets in general, there may be specific periods where it is positively correlated. Therefore, it is not accurate to say that the fund manager does not understand the basic facts of investing. Instead, it may be more accurate to say that the fund manager is taking a diversified approach to investing, which can help to reduce risk in the long term.