Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios

Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios — March 2015

Introduction

market equity is negative, the contribution of stocks with higher exposure to local markets to the performance of the index is lower than the contribution of stocks with lower exposure to the local market. We structure the paper as follows. Section 1 describes data and methodology. Section 2 reports the geographic exposure of developed markets indices using geographic segmentation data. Section 3 analyses the contribution of stocks having varied levels of geographic exposure to the performance of developed market indices.

and developed market equity and second, depending on the spread between the return on local and foreign market equity. We find that there are certain years when the difference in performance of high and low emerging market exposure portfolios to the contribution of index performance is large. For example, the contribution of high and low emerging market exposure portfolios during July 2004-June 2005 to the performance of the S&P 500 index was -0.70% and 5.04%, respectively. Also, we note that when the spread in returns of emerging and developed market equity is positive, the contribution of stocks with higher exposure to emerging markets to the performance of the developed market index is higher than the contribution of stocks with lower exposure to emerging market. Similarly, when the spread in returns of emerging and developed market equity is negative, the contribution of stocks with higher exposure to emerging markets to the performance of the developed market index is lower than the contribution of stocks with lower exposure to emerging markets. Similarly, the difference in contribution of high and low local market exposure portfolios to the performance of indices is significant in certain years. For example, the contribution of high and low local market exposure portfolios during July 2004-June 2005 to the contribution of the S&P 500 was 4.29% and -1.27%, respectively. Also, we note that when the spread in returns of local and foreign market equity is positive, the contribution of stocks with higher exposure to local markets to the performance of the developed market index is higher than the contribution of stocks with lower (higher) exposure to local markets. Likewise, when the spread in returns of local and foreign

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An EDHEC-Risk Institute Publication