Question

Calculate the contribution to total performance from currency, country, and stock selection for the manager in the example below. All exchange rates are expressed as units of foreign currency that can be purchased with 1 U.S. dollar. (Do not round intermediate calculations. Round your answers to 2 decimal places. Input all amounts as positive values.)

	EAFE Weight	Return on Equity Index				E1/E0	Manager's Weight	Manager's Return
Europe	0.6		18	%		1.2	0.7		17	%
Australasia	0.2		18			0.55	0.1		18
Far East	0.2		23			1.4	0.2		18

			Profit/Loss
Currency Selection		%		relative to EAFE
Country Selection		%		relative to EAFE
Stock Selection		%		relative to EAFE

Answer 1

Currency selection: EAFE/ Manager weight × Currency appreciation(E1/E0 -1)
EAFE: [0.60×(1.2-1)] + [0.20 × (0.55-1)] + [0.20 × (1.4-1)] = 11.0%
Manager: [0.70×(1.2-1)] + [0.1 × (0.55-1)] + [0.2 × (1.4-1)]= 17.5%
Profit of 6.5% relative to EAFE

Country selection:
EAFE/ Manager weight × Return on Equity Index
EAFE: 0.6×18% + 0.2 × 18% + 0.20 × 23% = 19%
Manager: 0.7×18% + 0.1 × 18% + 0.2  × 23% = 19%
No profit or loss to EAFE or Manager

stock selection : (Manager’s return - Return on Equity Index) × Manager weight
[ (17% - 18%) × 0.7] + [ (18% - 18%) × 0.1] + [(18% - 23%) × 0.2] = -1.7%
Loss of 1.7% relative to EAFE