I can see by LOS that market, currency, and security allocation are fair game. When looking at EOC questions they will talk about comparing to world benchmark (ie q 2c and 5d) First, do you think we are responsible for this? And if so, can someone explain to me how the world index return in base currency is calculated? I understand the total, but seem to not comprehend how they attribute to each country. I ask only because you need this number to get the other allocations Thanks for your input, always helpful

EOC questions are fair game.

I kind of got lost at 5d as well!!

Can anyone explain why they’re using portfolio weights and index returns for the market component in question 5, part C? Or what’s going in the currency allocation in part D? I’m lost too…

c’mon dark, you’re the attribution pro…

Take the world index value at time 0 divided it by the exchange rate at time 0. Then take the worl index value at 1 divided by the exchange rate at 1. Finally take the difference of these calculation. It is the return of your index.

darkstar Wrote: ------------------------------------------------------- > Can anyone explain why they’re using portfolio > weights and index returns for the market component > in question 5, part C? > > Or what’s going in the currency allocation in part > D? > > I’m lost too… i think the point in C is to find the weighted (portfolio weights) market return so you can use this to find the security selection contribution.

I guess one of the purposes of index return is to find out whether the manager was taking extra currency risk or not. The other one is to find out how much would have been the return if the manager just followed the benchmark weights (that is our starting point).

ozzy609 Wrote: ------------------------------------------------------- > c’mon dark, you’re the attribution pro… OK, yesterday was a bad day (trying to get them out of my system before Saturday!) I was misreading the question, it makes sense now. Anyone want me to explain it?

darkstar Wrote: ------------------------------------------------------- > ozzy609 Wrote: > -------------------------------------------------- > ----- > > c’mon dark, you’re the attribution pro… > > OK, yesterday was a bad day (trying to get them > out of my system before Saturday!) > > I was misreading the question, it makes sense now. > Anyone want me to explain it? Absolutely!

Don’t mean to bring this up again, but quick question. There are two ways of doing the calculations for Market, Currency and Security. Can anyone think of a rational for CFAI to insist on us using one over the other? I learned decomposition which makes sense to me, but worried about the nasty formulas they have for attribution. Anyone care to shed some light on this? Thanks in advance.

looking at the solution on A-27 for part D, i still get lost on the currency allocation to get the answer you take the currency contribution of the portfolio (in this case -0.87%) less currency contribution of benchmark. to get the currency contribution of benchmark: take the dollar return of each index less capital gain (found in part c) and find the weighted sum. but this is where is get lost: how do you get the dollar index return? they have the US, UK, and FR at 9.079%, 10.417%, and -2.64% respectively. I am trying to understand where they get these numbers from and then I will be done with this.

You need to convert the index prices to dollars using the Exchange rates effective at the time So 12/31/06 UK index is 1090 Exchange rate = 0.65/ 12/31/07 UK index is 1148 Exchange rate = 0.65/ So index at 12/31/06 = 1090/.65 = 1676.92 at 12/31/07 = 1148/.62 = 1851.61 \$ return of UK index = (1851.61 - 1676.92) / 1676.92 = 0.10417

^ OMG. it was in front of me this whole time. thanks a lot!!

passthismofo Wrote: ------------------------------------------------------- > Don’t mean to bring this up again, but quick > question. There are two ways of doing the > calculations for Market, Currency and Security. > Can anyone think of a rational for CFAI to insist > on us using one over the other? > > I learned decomposition which makes sense to me, > but worried about the nasty formulas they have for > attribution. > > Anyone care to shed some light on this? Thanks in > advance. If the question just asks us to show the sources of the portfolio’s return and doesn’t have the necessary benchmark information, then I think we’ll need to go with the decomposition/contribution formulas. If it says something to the effect of “compare to a benchmark”, then I am going with attribution. If it’s just a domestic market, I am going with the formulas in reading 47, and if it’s a multicurrency portfolio, then I am going with the formulas in reading 48. I’m hoping the questions won’t be vague and poorly worded. If they are, I’m in trouble!

Thanks Darkstar. I like your logic. I guess I wil have to learn the attribution then. Problem is…once I learn that, something else is going to seep out of my limited brain cells.

eriqnoodle Wrote: ------------------------------------------------------- > looking at the solution on A-27 for part D, i > still get lost on the currency allocation > > to get the answer you take the currency > contribution of the portfolio (in this case > -0.87%) less currency contribution of benchmark. > > to get the currency contribution of benchmark: > take the dollar return of each index less capital > gain (found in part c) and find the weighted sum. > > but this is where is get lost: how do you get the > dollar index return? > > they have the US, UK, and FR at 9.079%, 10.417%, > and -2.64% respectively. > > I am trying to understand where they get these > numbers from and then I will be done with this. The currency allocation term tells you the effects of allocating to currencies in a different way than the benchmark. This example was actually pretty straightforward actually from a currency perspective, but it can get very, very messy if you start looking at multiple markets with the same currency (like if you’re investing in France and Germany), or if you’re looking at a single market where stocks are traded in multiple currencies. I HIGHLY doubt something like this will show up on the exam, though. There’s actually another way to get the return in US Dollar, which in my opinion is probably quicker and easier than sv’s method above. UK Index 2006: 1090 UK Index 2007: 1148 Local return: 1148/1090-1 = 5.321% FX Rate 2006: .65 FX Rate 2007: .62 FX Return: .65/.62 = 4.839% US Dollar index return = (1.04839) * (1.05321) -1 = 10.417%