Question

Discuss and explain a performance evaluation of international portfolio managers in terms of potential sources of abnormal returns. A brief example should be provided to illustrate your points. Your answer should not exceed 500 words in length.

Answer 1

The following factors may be measured to determine the performance of an international portfolio manager.

(A) Currency selection: a benchmark might be the weighted average of the currency appreciation of the currencies represented in the EAFE portfolio.
(B) Country selection measures the contribution to performance attributable to investing in the better-performing stock markets of the world. Country selection can be measured as the weighted average of the equity index returns of each country using as weights the share of the manager's portfolio in each country.
(C) Stock selection ability may be measured as the weighted average of equity returns in excess of the equity index in each country.
(D) Cash/bond selection may be measured as the excess return derived from weighting bonds and bills differently from some benchmark weights.