Answer: Transaction costs of the new strategy will be ignored

## Explanation **Correct Answer: A** **Reasoning:** - **Option A (Incorrect):** Ignoring transaction costs is not appropriate in backtesting, even if transaction costs for non-domestic equities are similar to domestic equities. Transaction costs should be included in the backtest to provide a realistic assessment of the strategy's performance, as they directly impact net returns and the Sharpe ratio calculation. - **Option B (Appropriate):** Using historical scenario analysis with data from 1980 is appropriate for backtesting, as it allows the fund manager to evaluate the strategy's performance across different market conditions over a long period. - **Option C (Appropriate):** Computing the Sharpe ratio by translating all investment returns into the domestic currency is appropriate since no foreign currency hedging is planned. This approach reflects the actual returns that domestic investors would experience without currency hedging. **Key Concept:** Backtesting should incorporate realistic assumptions about transaction costs to avoid overestimating strategy performance.

Author: LeetQuiz Editorial Team