Say I'm trying to diversify my portfolio along multiple asset classes and countries. Many of those assets are in different currencies. For example, I'm based in the UK and I'm evaluating a 3 asset portfolio:

  • US large-cap mutual fund in USD
  • UK mid-cap mutual fund in GBP
  • Japanese bond fund in JPY

I'm looking for the optimal weights for the three assets. Should I convert the amounts in USD and JPY to GBP before I compute the returns, and compute the correlation matrix using the GBP returns? Or just use the returns in each currency to calculate the correlation matrix?

1 Answer 1


At the end of the day, what maters is your return in your currency. Why? Let's say I own a fund of a country experiencing a 20% inflation rate. So, the Elbonia index is up 30% year on year, and that's fine, but if I bring it back to my own currency, the exchange rate has accounted, to an extent, for the inflation, so it's up about 10% in my currency. And the Elbonians see 30%, but a real increase of 10%.

In my personal situation, my ETFs are priced in $US, so the exchange rate is embedded in the changing prices.

  • If you might move to another country (in this example, the UK or Japan), then might locally-denominated holdings in a local account make sense to avoid country failure risk (e.g., Germany and Japan in WWII, Russia and China in revolutions, Argentina's financial failure, hyperinflation, etc.)? Mar 3, 2019 at 23:29

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