A Canadian investor, holding a portfolio diversified with 30% U.S. equities, observes that the Canadian dollar (CAD) has been appreciating significantly against the U.S. dollar (USD) over the past six months. Assuming all other factors remain constant, what is the most likely impact on the CAD value of their U.S. equity portfolio?

Question: A Canadian investor, holding a portfolio diversified with 30% U.S. equities, observes that the Canadian dollar (CAD) has been appreciating significantly against the U.S. dollar (USD) over the past six months. Assuming all other factors remain constant, what is the most likely impact on the CAD value of their U.S. equity portfolio?

Answer options:

• The CAD value of their U.S. equity portfolio will increase. ✅ The CAD value of their U.S. equity portfolio will decrease.
• The CAD value will remain unchanged, as the investment is in U.S. dollars.
• The CAD value will increase only if Canadian interest rates are higher than U.S. interest rates.

Correct answer: The CAD value of their U.S. equity portfolio will decrease.

Explanation: When the Canadian dollar appreciates against the U.S. dollar, it means one CAD can buy more USD. Therefore, existing U.S. dollar-denominated assets, when converted back to CAD, will be worth less in Canadian dollars.