f. We can think of the return in local currency as the equity contribution to the...

Transcribed Image Text:

f. We can think of the return in local currency as the "equity contribution" to the overall return from investing in a particular international market. Similarly, the difference between the return in USD and that in local currency can be thought of as the "currency contribution". Calculate the standard deviations of the equity and currency contributions, as well as the correlation between the two, for the two international markets examined in (a). Why are the standard deviations of currency contributions here larger than the incremental standard deviations from currency fluctuations calculated in (e)? ANSWER: European markets: Standard deviations of equity and currency contributions 14.86_ and 8.79 Correlation -0.0505_ Emerging markets: Standard deviations of equity and currency contributions 19.8 _7.5_ and Correlation 0.129 Why are the above standard deviations of currency contributions larger than the incremental standard deviations in (e)? due to smaller correlation 365 A B C D E F G 366 Count 367 368 Annualized Average Returns 369 Standard Deviation 360 370 Sharpe Ratio 10.67% 8.57% 14.26% 14.86% 0.52954 0.36694 371 Correlation Uh EU-Uh EM 16.88% 0.32842 US-Uh EU 8.66% 19.95% 11.57% 19.88% 0.84633 22.16% 0.38148 US-Uh EM 372 Entire Sample 0.72268 0.79737 0.69141 373 Jan 1990 Dec 2004 0.59915 0.72917 0.62553 374 Jan 2005 Dec 2019 0.84737 0.86779 0.76681 375 Hurdle Sharpe Ratio 376 Hurdle Sharpe Ratio Diversify 377 Incremental Average Return 378 Incremental Standard Deviation 379 Equity SD 380 Currency SD 381 Correlation 0.42224 0.36613 NO YES 0.09% 2.02% -8.37% 2.28% 14.86% 19.88% 382 383 201 f. We can think of the return in local currency as the "equity contribution" to the overall return from investing in a particular international market. Similarly, the difference between the return in USD and that in local currency can be thought of as the "currency contribution". Calculate the standard deviations of the equity and currency contributions, as well as the correlation between the two, for the two international markets examined in (a). Why are the standard deviations of currency contributions here larger than the incremental standard deviations from currency fluctuations calculated in (e)? ANSWER: European markets: Standard deviations of equity and currency contributions 14.86_ and 8.79 Correlation -0.0505_ Emerging markets: Standard deviations of equity and currency contributions 19.8 _7.5_ and Correlation 0.129 Why are the above standard deviations of currency contributions larger than the incremental standard deviations in (e)? due to smaller correlation 365 A B C D E F G 366 Count 367 368 Annualized Average Returns 369 Standard Deviation 360 370 Sharpe Ratio 10.67% 8.57% 14.26% 14.86% 0.52954 0.36694 371 Correlation Uh EU-Uh EM 16.88% 0.32842 US-Uh EU 8.66% 19.95% 11.57% 19.88% 0.84633 22.16% 0.38148 US-Uh EM 372 Entire Sample 0.72268 0.79737 0.69141 373 Jan 1990 Dec 2004 0.59915 0.72917 0.62553 374 Jan 2005 Dec 2019 0.84737 0.86779 0.76681 375 Hurdle Sharpe Ratio 376 Hurdle Sharpe Ratio Diversify 377 Incremental Average Return 378 Incremental Standard Deviation 379 Equity SD 380 Currency SD 381 Correlation 0.42224 0.36613 NO YES 0.09% 2.02% -8.37% 2.28% 14.86% 19.88% 382 383 201