As the newest member of the asset allocation team in your firm, you con. stantly find yourselt being quizzed by your fellow group members. The topic this morning is international diversification. One analyst asks you the following question:

Security prices are driven by a variety of factors, but corporate earnings are clearly one of the primary drivers. And cotporate earnings-on average-fol. low business cycles. Exchange rates, as they taught you back in college, reflect the market's assessment of the growth prospects for the economy behind the currency; So if securilies go up with the business cycle, and currencies go up with the business cycle, why do we see currencies and securitics prices across the globe not going up and down together?

How would you answer?