As the newest member of the asset allocation team in your firm, you constantly find yourself being quizzed by your fellow group members. The topic is international diversification. One analyst asks you the following question:
Security prices are driven by a variety of factors, but corporate earnings are clearly one of the primary drivers. And corporate earnings—on average—follow business cycles. Exchange rates, as they taught you in college, reflect the market’s assessment of the growth prospects for the economy behind the currency. So if securities go up with the business cycle, and currencies go up with the business cycle, why do we see currencies and securities prices across the globe not going up and down together? What is the answer?

  • CreatedOctober 13, 2015
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