First, calculate the difference between the U.S. dollar return and the local currency return for both the portfolio and the benchmark in each country:
Portfolio Japan = (14.95% - 21.00%) = -6.05%
Benchmark Japan = (13.53% - 19.50%) = -5.97%
Portfolio United Kingdom = (7.52% - 12.00%) = -4.48%
Benchmark United Kingdom = (8.96% - 13.50%) = -4.54%
Portfolio France = (6.09% - 8.25%) = -2.16%
Benchmark France = (7.80% - 10.00%) = -2.20%
Currency allocation effect = SUM (w
j,p C
j.p) - (w
j,b C
j.b)
[(0.40 × -6.05%) – (0.20 × -5.97%)] + [(0.30 × -4.48%) – (0.40 × -4.54%)] + [(0.30 × -2.16%) – (0.40 × -2.20%)] = [-1.23% + 0.47% + 0.23%] = -0.53%
