New study reveals key to understanding global portfolio returns.
The study evaluated different models to see how well they can predict international asset returns. They found that a model including foreign exchange risk factors can explain a large part of the variation in returns for global portfolios based on earnings-price ratio and market value. This model performed similarly to a three-factor model that also included zero-cost portfolios based on earnings-price ratios and market values. The characteristics of these portfolios themselves drove the results, indicating a successful explanation of returns.