An American investor has invested $100,000 in a global equity portfolio made up of U.S., Asian, and European stocks. On December 31, the portfolio is invested in 500 IBM shares listed in New York, 200 Sony shares listed in Tokyo, and 50 BMW shares listed in Frankfurt. He wants to beat the World index used as benchmark. This index has a 50 percent weight in the U.S. stock index, a 25 percent weight in the Japanese stock index, and a 25 percent weight in the European stock index. The country components of the portfolio have average risk relative to their respective country indexes. He uses the U.S. dollar as base currency. On March 31, his portfolio has gained 4.065 percent, while the World index gained only 0.735 percent in dollars. He wishes to understand why his portfolio had such a good performance over the quarter. All necessary data are given in the following tables. There were no cash flows in the portfolio, nor any dividends paid.
a. Decompose the total return on the portfolio into capital gains (in local currency) and currency contribution.
b. What is the contribution of security selection?
c. Attribute the performance relative to the benchmark (World index) to the various investment decisions.

Transcribed Image Text:

Global Equity Portfolio: Composition and Market Data Price (in local currency) Portfolio Value on Dec. 31 Portfolio Value on Mar. 31 Number of Shares Portfolio Dec. 31 Mar. 31 Local Currency Dollar Local Currency Dollar US. stocks IBM Japanese stocks 100 0,000 600 52,500 20,952 30,612 500 105 50,000 2,000,000 30,000 50,000 20,000 30,000 52,500 2,200,000 30,000 Sony European stocks 200 11,000 BMW Total 50 600 100,000 104,065 Market Data Dec. 31 Mar. 31 World index ($) U.S. index ($) Japanese index (Y) European index () Yen per dollar Euro per dollar 100 100 100 100 100 100.735 103 105 95 105 0.98