Reading 44: Evaluating Portfol....rmance－LOS a return, investor, currency

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 16: Performance Evaluation and Attribution
Reading 44: Global Performance Evaluation
LOS a: Evaluate the effect of currency movements on the portfolio rate of return, calculated in the investor's base currency.

tycoon

FQ global fund is a US fund with investments in European equity and was valued at 102 million Euros as of January 1, 2003. During the first quarter of 2003, dividend income paid out by the fund was 2.3 million Euros. The fund was valued at 105.10 million Euros as of March 31, 2003. During the quarter, the Euro appreciated by 2 percent against the US Dollar. What is the capital gains yield on the fund in local currency?

A) 5.10%.

B) 3.10%.

C) 2.25%.

D) 3.04%.

---

Answer and Explanation

Capital gains yield in local currency = (105.10/102) 1 = 3.04%.

tycoon

FQ global fund is a US fund with investments in European equity and was valued at 102 million as of January 1, 2006. During the first quarter of 2006, dividend income paid out by the fund was 2.3 million. The fund was valued at 105.10 million as of March 31, 2006. During the quarter, the Euro appreciated by 2 percent against the U.S. Dollar. What is the dividend yield on the fund in local currency?

A) 3.04%.

B) 2.25%.

C) 3.10%.

D) 5.10%.

---

Answer and Explanation

Dividend yield in local currency = 2.3/102 = 2.25%.

tycoon

FQ global fund is a US fund with investments in European equity and was valued at 102 million as of January 1, 2003. During the first quarter of 2003, dividend income paid out by the fund was 2.3 million. The fund was valued at 105.10 million as of March 31, 2003. During the quarter, the Euro appreciated by 2 percent against the US Dollar. What is the total return on the fund in local and home currencies?

A) 5.10%; 7.10%.

B) 3.10%; 5.10%.

C) 5.10%; 7.40%.

D) 5.29%; 7.40%.

---

Answer and Explanation

Total return in local currency = Capital gains yield +Dividend yield

= [(105.10/102) 1] + (2.3/102)

3.04 + 2.25 = 5.29%

Total return in home currency = Capital gains yield + Dividend yield + Currency effect

Currency effect = e_j × (1 + CG_j + D_j) = 0.02 × (1 + 0.0304 + 0.0225) = 0.0211 or 2.11%

Total return in home currency = 5.29% + 2.11% = 7.40%

Total return in local currency = Capital gains yield +Dividend yield

= [(105.10/102) 1] + (2.3/102)

3.04 + 2.25 = 5.29%

Total return in home currency = Capital gains yield + Dividend yield + Currency effect

Currency effect = e_j × (1 + CG_j + D_j) = 0.02 × (1 + 0.0304 + 0.0225) = 0.0211 or 2.11%

Total return in home currency = 5.29% + 2.11% = 7.40%