TITLE

The Role of Foreign Currency Investment in a Global Equity Portfolio

AUTHOR(S)
Ratner, Mitchell; Meric, Gulser; Meric, Ilhan
PUB. DATE
July 2007
SOURCE
Journal of Financial Planning;Jul2007, Vol. 20 Issue 7, p62
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• This paper investigates the use of foreign currency as an investment asset in a diversified portfolio. The data consist of U.S. equity returns, foreign equity returns, and six foreign currencies from 1975 to 2006. • A portfolio optimization technique is applied using actual and simulated data to test the long-term portfolio implications of foreign currency investment, A base scenario of 100 percent U.S. equities is employed. Then, four optimized portfolios are created: two constrained U.S. equity portfolios and two unconstrained portfolios, with and without foreign currencies. Both U.S. dollar (unhedged) and local currency (hedged) datasets are analyzed. • The results indicate that investment in foreign currency improves the Sharpe ratio and is a potential defensive asset given its low correlation with U.S. equities, Foreign equity markets have higher correlation coefficients with U.S. equities and thus appear to offer less risk-reducing potential than foreign currencies. • Theoretically, holding foreign currency over the long term is potentially beneficial to U.S. investors. But to achieve the maximum benefit, U.S. investors may have to unrealistically concentrate their funds exclusively in foreign equities, with a substantial investment in foreign currency. • In a global equity portfolio containing 60-80 percent U.S. stocks, the incremental benefit of adding foreign currency provides a negligible improvement.
ACCESSION #
25657173

 

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