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Abstract
Many investors that adopt minimum volatility strategies are inadvertently allowing unnecessary volatility in their minimum volatility allocations by ignoring the underlying currency assumptions used in building their portfolios. Specifically, portfolio country weights can vary widely depending on the currency used in calculating risk. In this article, the authors provide empirical evidence that the currency of the risk calculation should match the currency used in evaluating the portfolio’s performance. In practice, many investors are well aware of the latter but unaware of the former, which can be embedded in commonly available benchmarks and investment vehicles. Any mismatch can lead to increased volatility.
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Strategies? The Ignored Impact of Currency Risk
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