The Role of Foreign Currency Investment in a Global Equity Portfolio

Ratner, Mitchell; Meric, Gulser; Meric, Ilhan
July 2007
Journal of Financial Planning;Jul2007, Vol. 20 Issue 7, p62
Academic Journal
• 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.


Related Articles

  • Dollar Hits The Skids As US Rate Cut Looms. Platt, Gordon // Global Finance;Sep2007, Vol. 21 Issue 8, p61 

    The article reports about the currency forecasting which shows the declination of the U.S. dollar against the euro due to the interest rates cut. It is said that the continued weakening performance of yen had acted as a major stabilizer of the dollar's overall value at a time when the U.S....

  • PHP: A Near-Term Depreciatory Bias.  // Emerging Markets Monitor;2/8/2010, Vol. 15 Issue 42, p8 

    This article presents an outlook for the value of the Philippine peso against the U.S. dollar in 2010. Business Monitor International (BMI) expects the Philippine peso to depreciate during the year. BMI attributes the scenario to prolonged risk aversion, the appreciation of the U.S. dollar and...

  • Mauritian Rupee: Facing Downside Risks.  // Emerging Markets Monitor;10/20/2008, Vol. 14 Issue 28, p20 

    The article reports on the performance of the Mauritian rupee against the U.S. dollar. Since October 1, 2008, value of the currency has fallen by 9.9 percent, trading at a low of 30.75 is to 1. It is noted that the weakening of the Mauritian rupee is related to risk aversion. The rupee also...

  • COP: Shaping Up For Further Strength.  // Emerging Markets Monitor;7/27/2009, Vol. 15 Issue 17, p12 

    The article presents an outlook for the performance of the Colombian peso in the foreign exchange market as of July 2009. The currency is expected to move towards 1,950 against the U.S. dollar as the peso managed to push through key resistance at 2,000 against the dollar on July 21. Among the...

  • Hedgers see green over boost in dollar. Barr, Paul G. // Pensions & Investments;8/21/1995, Vol. 23 Issue 17, p6 

    Reports on currency managers' positive response to the sharp climb of the American dollar relative to other major currencies. Anticipation of an increase in the use of currency overlay management; Drop in any currency-related gains on non-United States portfolios; Drop in unhedged international...

  • U.S. Dollar Positions: Weekly Report of Major Market Participants.  // Treasury Bulletin;Sep2004, p102 

    Presents a table depicting weekly report of major foreign exchange market participants on holding of U.S. dollars.

  • U.S. Dollar Positions: Monthly Report of Major Market Participants.  // Treasury Bulletin;Sep2004, p103 

    Presents a table depicting monthly report of major foreign exchange market participants on holding of U.S. dollars.

  • U.S. Dollar Positions: Quarterly Report of Large Market Participants.  // Treasury Bulletin;Sep2004, p103 

    Presents a table depicting quarterly report of large foreign exchange market participants on holding of U.S. dollars.

  • Riding intermarket trends in the U.S. dollar. Murphy, John // Futures: News, Analysis & Strategies for Futures, Options & Deri;Apr2004, Vol. 33 Issue 5, p42 

    Explains that American dollar strength plays an important role in the price relationships between stocks and bonds, commodities, interest rates, and beyond, and traders active in these markets should understand the effects of foreign exchange rates and how trends in the dollar ripple through the...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics