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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?

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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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  • $\begingroup$ But Let's say that for one period no returns were generated by either Assets but rather the fx rate against CAD appreciated by 1% and thus the % weighting of A increases for the next period. From the Brinson formula, this can state an over or under performance in terms of allocation or selection effect right? $\endgroup$ – Kevin Pei Nov 30 '15 at 15:07
  • $\begingroup$ @KevinPei: sure, in this case your portfolio attribution should disclose the currency effect attributable to CAD appreciation. It will theoretically be misleading/incorrect to isolate any currency effect from your portfolio attribution, in particular if you have lots of off-base (ccy) securities. This is a frequent situation while performing portfolio attribution on funds with several share classes (for various purposes such as hedgding). PS: Always bear in mind the purpose of portfolio attribution. $\endgroup$ – owner Nov 30 '15 at 20:51

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