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


What You can do is to just calculate the daily returns, Mean Returns and Excess Returns for each asset, Generate a Variance-Covariance Matrix and multiply it by the Standard Deviation Matrix to generate a Correlation Matrix.

  • $\begingroup$ @RiskTech, please mark the above appropriately if it works for you. $\endgroup$ – I. Я. Newb Nov 13 '18 at 20:39

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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