Using Base-Currency Weights in Portfolio Attribution

Summary

The post asks how to isolate equity performance from currency effects in a Brinson 1985 portfolio attribution when holdings use different currencies. It proposes expressing each holding’s value in the portfolio’s base currency before calculating its weight. In the example, a USD holding is converted to CAD using the exchange rate, then divided by the total portfolio value in CAD; a CAD holding remains in its native currency.

The accepted reply confirms that, for a CAD-base portfolio, the asset weights should also be measured in CAD. This gives a practical rule for consistent valuation across currencies when computing attribution weights. The discussion does not provide a full decomposition of currency and equity returns, a worked numerical example, or guidance on compounding attribution effects over multiple periods. Those details would need to be established separately for the chosen attribution method and reporting conventions.

Key ideas

• Calculate portfolio weights using asset values expressed in the portfolio’s base currency.
• Convert foreign-currency holdings into the base currency before comparing them with domestic holdings.
• For a CAD-base portfolio, the accepted reply endorses weights measured in CAD.
• The post does not explain how to aggregate attribution across multiple periods.

Tags

# Weights in Portfolio Attribution when considering Currency


# Weights in Portfolio Attribution when considering Currency












I'm performing a simple Portfolio attribution with the Brinson 1985 model where returns are decomposed into both an allocation component and a selection. Using the formula, I first did the attribution with all assets denominated in my local currency (CAD) and I noted that a lot of my assets are in USD. My question is, if I want to extract out the currency effect and only decompose the returns based on equity moves. How would I go about calculating the correct weight? I should also note that I am doing this on a multi-period basis so any help on that would be appreciated.

For example, If Stock A is in US Dollar and Stock B is in CAD in a two-asset portfolio, the non-equity return for A is simply just the stock return in US dollar. However, the Weight of the stock $W_A$ is dependent on the exchange rate $W_A = \frac{Val_{A}*USDCAD}{(Val_{A}*USDCAD + Val_{B})}$. Would it still be correct that I use the weight given there or do I need to calculate it from a different perspective?

## Answer by owner (score 1, accepted)

https://quant.stackexchange.com/a/21996

If the base `ccy` of the your portfolio is `CAD`, then it makes sense to use the asset weights in `base` too (`= CAD`) according to your described formula.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.