The capital asset pricing model of Sharpe [21], Lintner [13] and Mossin [16] has been successfully extended by Rubinstein [18], Fama and Miller [8] and others to the area of corporate investment decisions. To the extent that the SLM model is a reasonable representation of how assets are priced in the domestic market, the model can serve as a sound theoretical decision criterion for U.S. firms investing in the U.S. market. For a multinational firm, however, the SLM model cannot be used as an investment criterion. This is true whether the international capital market is assumed to be segmented or integrated. Some researchers such as Black [4], Grubel [10], Cohn and Pringle [7] and Subrahmanyam [25] argue for the segmented market hypothesis, but recent empirical work by Agmon [3], Hughes et al. [11], Solnik [23], Stehle [24] and Chen et al. [6] provide some evidence that the international capital market is sufficiently integrated and efficient to provide for an international pricing of risk. Several international pricing models have been advanced, most notably those of Solnik [22], Adler and Dumas [2], Senbet and Chen [19] and most recently, Mehra [15]. While it is not the purpose of the present paper to debate the merits of these competing models, it is necessary, however, that one model be selected for the proceeding analysis. Due to the somewhat restrictive assumptions used by Solnik [22] and Adler and Dumas [2], the models of Senbet and Chen [19] and Mehra [15] shall be used in this paper. The latter two models are international equilibrium pricing models which explicitly incorporate the exchange risk factor.