Here we try to answer this question: if you were to take US Dollars into five currencies, selected out of the top 15 currencies, what would an allocation look like?

Note that we are solely focused on diversifying price risk (the levels of those currencies relative to the USD), and do not take into account interest rates differentials / carry of the positions.

Symbol Currency Name Issuer Target Allocation (%)
CADUSD Canadian Dollar Bank of Canada 19.812763
CNYUSD Renminbi People’s Bank of China 21.006937
DKKUSD Danish Krone Danmarks Nationalbank 12.255831
ILSUSD New Shekel Bank of Israel 9.261575
SGDUSD Singapore Dollar Monetary Authority of Singapore 37.662894

» Performance chart of our allocation versus its benchmark:

 

 

                    Note: The benchmark (Short Position in Bloomberg Dollar Spot Index) has been scaled to achieve equal volatility over the period, in order to get a pound for pound visual comparison of compounded returns.

 

» Key performance metrics over the last 18 months:

Total Return Realized Volatility Relative Volatility / Benchmark Excess Return1 Sharpe Ratio1 Maximum Drawdown2 Calmar Ratio Correlation Beta R-squared3 Annualized Alpha4 Treynor Ratio Up Capture Down Capture Active Return5 Tracking Error5 Information Ratio5
ALLOCATION 3.2% 5.1% 0.73 -4.2% -0.82 -5.7% 0.56 0.91 0.66 83% 1.4% 0.05 65.7% 63.0% 1.1% 2.2% 0.52
BENCHMARK 2.6% 7.0% – -4.7% -0.67 -7.8% 0.34 – – – – – – – – – –
CADUSD -2.3% 6.5% 0.93 -9.7% -1.48 -7.6% 0.3 0.71 0.66 51% -3.9% -0.03 61.2% 68.8% -4.8% 5.0% -0.96
CNYUSD 0.2% 5.0% 0.71 -7.2% -1.44 -4.6% 0.05 0.31 0.22 10% -0.3% 0.01 21.6% 22.1% -1.8% 5.9% -0.32
DKKUSD 8.0% 9.3% 1.32 0.6% 0.07 -8.5% 0.94 0.91 1.21 84% 4.8% 0.07 121.2% 112.0% 4.4% 3.8% 1.14
ILSUSD 7.5% 12.8% 1.82 0.1% 0.01 -7.0% 1.07 0.2 0.36 4% 7.3% 0.21 40.6% 26.9% 1.5% 16.2% 0.1
SGDUSD 4.8% 6.2% 0.89 -2.6% -0.41 -6.8% 0.71 0.91 0.8 82% 2.6% 0.06 80.8% 75.7% 2.4% 2.7% 0.88
Notes:
1 For the estimation of the Sharpe ratio, we calculated excess return and excess volatility against the daily returns of the Nasdaq US T-Bill V2 Index (“NQCASH2”).
2 Drawdowns are calculated on daily closing prices (i.e. not intraday highs and lows).
3 The R-squared indicates how much the variance of a security can be explained by the variance of the benchmark: if a security has a low R-squared value, the CAPM single-factor linear relationship doesn’t explain much of the variance of the security, and the CAPM metrics (beta, alpha, Treynor ratio) are not useful for this particular security.
4 The annualized alpha is a compounded calculation from CAPM estimations on daily returns.
5 The active performance metrics are calculated relative to the volatilty-adjusted benchmark (i.e. the benchmark multiplied by the relative volatility of the allocation).

» Charting each security in the allocation:

 











Check out some of our other allocations and please get in touch if you have any comments or questions.
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