Paape, Conny : Performance Evaluation of Global Investment Portfolios: The Role of Currencies

Author(s):

Paape, Conny

Title:

Performance Evaluation of Global Investment Portfolios: The Role of Currencies

Electronic source:

application/pdf

Preprint series:

Technische Universität Chemnitz, Fakultät für Mathematik (Germany). Preprint 8, 2001

Mathematics Subject Classification:

91B28

[ Finance, portfolios, investment ]

Abstract:

The aim of performance evaluation is to make qualified statements about the success of management in allocating and selecting investment portfolios. Over the last 20 to 30 years many approaches have been developed for directly comparing actively managed portfolios to passively managed benchmark portfolios. During the late 1980s the main interest was on finding and defining attribution variables (allocation and selection variables). Beginning in the 1990s theoretical focus shifted to global investment portfolios and the handling of currencies and currency management. Nevertheless, by focussing on local currency and exchange rate returns while ignoring interest rate differentials, conventional performance evaluation systems retained the independence of market and currency management, leading to improper results. This paper presents a method of performance measurement that employs the dependence of both management stages in terms of allocation processes, but allows their separation in terms of selection processes. As a consequence, interpretation of performance evaluation is much more reasonable, and leads to the same results, whether the investment process starts with market management followed by currency management, or vice versa. Numerical examples make this clear.

Keywords:

financial mathematics, performance evaluation, currency management

Language:

English

Publication time:

11 / 2001