“Simple Portfolio B” GIVEN AND UNDERSTOOD: -Benchmark has weights 50% Japan and 50% Europe -Investor is 40% Japan and 60% Europe (therefore underweight Jap and Over Eur) Jpn Info: -Dollar$ return on Japanese Market is 0% ((Index 105/105Yper$))-1 =0 -and the return in Yen is 5% (yen index went to 105 from 100) Therefore "CURRENCY CONTRIBUTION " is -5% Eur Info: -Dollar$ european Index return is -3.06% ((Index 95/98 eur/$eurper))-1= -3.06 -and index return in Euros is is -5% (eur index went to 95 from 100) Therefore the "CURRENCY CONTRIBUTION " is 1.94% So I UNDERSTAND the “Market Allocation Contribution” .10 x (-5%) - .10 x (+5%) =-1% because its saying we Underweighted Japan which returned positive 5% (so a negative to us of .005) and we overweighted Europe by 10% which was a -5% return so another negative .005 so total market allocation contribution was -1.0% What I DONT UNDERSTAND: Is Bottom of page 88, right underneath where the -1.0% was calculated it says "PERFORMING A SIMILAR CALCULATION FOR THE “CURRENCY ALLOCATION CONTRIBUTION” WE FIND A NET CONTRIBUTION OF .66%. SOOO… I perform the same method for currency… we underweighted Japan 10% which had -5.0% currency return so this would be a positive for us, and we overweighted euro by 10% which had a 1.94% currency contribution, another positive… So I would expect formula for currency contribution is (.10 x .05) + (.10 x .0194) but this equals .694% and not .66% like book says.
the formula is wj*cj - Wj*Cj where wj = weight of stock j in the portfolio cj = currency contribution of stock j in the portfolio Wj = weight of stock j the benchmark Cj = currency contribution of stock j in the benchmark in Exhibit 3, p.86 they calculated stocks’ currency contribution, so you just plug it all in the formula above (.4*-.0524 + .6*.0204) - (.5*-.05 + .5*.0194) = .00658 or .66% the reason your answer was close because the formula above could be approximated by wj*cj - Wj*Cj = (wj - Wj) * sj (this is approximation) where sj = percentage exchange rate movement (using DC/FC notation) both cj and Cj are close to sj cj = sj * (1 + pj) Cj = sj * (1 + Ij) where pj = capital gain of segment j in percent Ij = return in local currency of the market index corresponding to segment j in percent
Volkovv, you are going to rip this exam. Wow what an answer thanks alot! So to confirm : the “market allocation contribution” of -1% is strictly for the Indexes (over/under weights) but for the currency contribution allocation im trying to put the formula in lamens terms: (.4*-.0524 + .6*.0204) - (.5*-.05 + .5*.0194) -.0087 - (-.0153) = .0066 or .66% “we have to take into account the currency returns on the shares themselves AND the effects of currency returns of the indexes combined” Yen shares increased 10%Y, but return Yen shares was 4.76% therefore -5.24% currency contribution. Euro shares increased 0% eur, but return of euro shares was 2.04%, therefore 2.04% contribution which was -.87% “Currency contribution of Investors SHARES” and the currency contribution of -.0087 from investors shares is LESS than currency contribution of the Index of -.0153 by .66% our portfolio had a positive currency contribution. DAMN!!! I owe you a beer
that is correct your market allocation contribution formula is (wj - Wj) * Ij which is the difference in weights of portfolio and benchmark as the result of underweighting/overweighting times return on the benchmark in local terms the currency allocation contribution is the weighted difference between portfolio currency contribution and the benchmark currency contribution
hey guys im have a ton of problems with this example as well. Why is the Dollar$ european Index return calculated as (Index 95/98 eur/$eurper))-1= -3.06? Shouldn’t it be 95/0.98?? Why are you multiplying the fx rate by 100?