Currency allocation effect = Portfolio weight x (Domestic portfolio return - Foreign portfolio return) LESS Benchmark weight x (Domestic benchmark return - Foreign benchmark return) Market allocation effect = Foreign benchmark return x (portfolio weight - benchmark weight) Security allocatin effect = Portfolio weight x (foreign portfolio return - foreign benchmark return)
For 2007 Exam: If you take these three formulas and make the weights in the benchmark portfolio equal to zero you get the correct answers. Why is that? Are you assuming the benchmark is zero, as was stated in another thread? Thanks.
how do those formulas change if the benchmark is not zero?? please help…
Iwona, Those are the general formulas given by Schweser, for when the benchmark is not zero (notice the use of benchmark weights). If you aren’t given benchmark weights, supposedly, use zero and the same formula works. I didn’t try it yet, if I see 2007 question again, I’m just going to use common sense.
Just on this topic. CFAI reading 44 end of chapter question 5.Part D (page A-16) Can someone point out how the dollar return was derived for the World Index Benchmark ?
I’m assuming you are referring to the currency allocation for the global performance attribution. Currency contribution - sum {benchmark weight i [dollar return of index i % less return of index i]} currency contribution = -.868% -.868% - [1.0194% + -1.77%] = -.1174% UK: 12/31/01 - 1148 / .62 = 1852 12/31/00 - 1090 / .65 = 1676 1852 / 1676 = 1.1047 - 1 = 10.47% 1148 / 1090 = 1.05321 - 1 = 5.32% 20% * ( 10.417% - 5.32%) = 1.0194% France: 12/31/01 - 1009 /1.2 = 842 12/31/00 - 950 / 1.1 = 864 842 /864 = .9745 - 1 = -2.64% 1009 / 950 = 1.0621 - 1 = 6.21% 20% * ( -2.64% - 6.21%) = -1.77%
The Schweser formulas calculate the EFFECT of selection, currency etc. Generally, you are trying to determine the cause between the difference between your return and an index. Hence, to reconcile to your return, you calculated the benchmark return and add all the Schweser formula stuff. In the 2007 exam, the 1st question was Market return, which was just the Index return. The you calculated the currency impact and security effect. If you were given the benchmark in the base currency, then you would have to calculate the currency effect different (Schweser way).
all you have to do is put zero for the benchmark on the 2007 question and voila!
The end of chapter questions in the CFAI text were HARD!!! Couldn’t believe how all over the place I felt going through those when compared to the Schweser Material.