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If i have a portfolio of stocks from different currencies and i want to generate a correlation matrix from the stocks, how is the correct procedure ?

Imagine a portfolio which the base currency is Brazilian Reais (BRL) and i have stocks quoted in BRL, EUR and USD. The correct way to generate a correlation matrix is :

a) Use the returns on the stocks in each currency and generate the matrix

b) Adjust all returns to the portfolio base currency and then generate the matrix

c) Other Solution

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1 Answer 1

Both ways are equivalent (assuming we are talking about net returns, and not forgetting any kind of transaction cost).

Remember that returns are percentages: they are calculated as $$ \frac{P_1 - P_0}{P_0}\times 100$$ [where $P_0$ is the price at the beginning of the period and $P_1$ is the price at the end] so it does not matter what currency you quote the price in: the "units" [of currency] fall off.

So you can stick with your a) to save some time and don't worry about doing b).

Good luck!

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