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Investment flows from one country to another occur based on the investors' a. spot exchange rate...

Investment flows from one country to another occur based on the investors'

a. spot exchange rate when making the investment.

b. the realized real rate of return on the foreign investment.

c. the expected real rate of return on the foreign investment.

d. nominal rate of return on the foreign investment

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Answer #1

c. the expected real rate of return on the foreign investment.

Investments are made based upon the yield rate of return. Hence if an investor expects higher yield rate of return from a particular investment in a certain country, the investment will be diverted there. The nominal returns are not taken into account because the impact the value of the investment drastically due to inflation. Similarly the realized rate is not the determinant of decision making rather the expected rate is.

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