What is the formula for calculating domestic return on a foreign-currency investment?

The formula for calculating the domestic return on a foreign-currency investment takes into account both the return from the foreign asset and the foreign exchange return. When an investor holds a foreign investment, they need to consider how fluctuations in currency values affect the total return.

The correct formula combines the foreign currency return and the return from the foreign asset effectively. This is represented by multiplying (1 + fx return) with (1 + foreign currency asset return) and then subtracting 1. The multiplication reflects the compounding effect of the two returns, capturing the contribution of both the foreign investment performance and the currency movement on the overall return when converted back to the domestic currency.

This method ensures that the investor sees the total impact of their investment rather than considering the two returns in isolation. It accurately reflects the domestic investor's perspective, incorporating the necessary adjustment for currency fluctuations coupled with the performance of the investment itself.