If you want to see the question, refer to Schweser book 5, page 78 question 6. A manager of an international portfolio uses country weights identical to the benchmark. Based on this, which is true a) both currency and market allocation effects are zero b)neither are zero c) market effect is zero, currency effect may be nonzero d) currency effect is zero, market effect may be non zero I am saying C and see no way that is wrong. Schweser is saying D. Thoughts?
My first thought was C as well. But here is an attempt rationalize the Schweser answer. Unless the portfolio is balanced daily, country weights will drift and may cause a market effect. As far as currency effects are concerned, since all countries are represented in the benchmark, for any currency pair the impact of an appreciating currency is balanced by that of the depreciating currency. Thus the net currency effect would be zero. What do you think?
yep, philly20, schweser is wrong. My answer is C
The correct answer is C. There is errata from Schweser website on this. Book 5, Page: 78 - Correction In Question 6 you should assume the country weights are weights. With that assumption, the correct answer is C. - sticky
I did not understand the errata - you should assume the country weights are weights???
You should also assume that butter is buttery and water is watery
Thanks a lot for that Sticky, I forgot about the area on the website where Schweser checks for errors. CFA Atlanta- I see what youre saying but I dont think thats a valid argument. If the portfolio weights start off at the benchmark weights and then drift, techincally the benchmarks will drift too (assuming it is a value weighted index). Either way, mathematically the market effect has to equal zero. Luckily Schweser corrected the error