10-Year Risk vs. Return, 11/30/04–11/30/14 Impact of Adding Dollar Bull Strategies into Balanced Portfolios
Additionally, Sharpe ratios improved incrementally until the dollar strategy comprised 50% of the portfolio. While it is impractical to expect that an investor would allocate 50% of a portfolio to a dollar bull strategy, it does suggest that incremental allocations to dollar bull strategies can deliver valuable diversification benefits.
More Recent Period of Dollar Strength
Looking more narrowly at the last three years, we find the analysis yields similar results in terms of return retention and risk reduction. Given higher asset returns and lower volatilities in recent years, the return sacrifice for incorporating dollar bull strategies is a little bit greater, and the absolute risk reduction is a little bit less. But the basic diversification premise holds, and we strongly consider that investors look for opportunities to incorporate dollar bull strategies into their portfolios.
1Proxied by the G-20 Liquidity Weighted Currency Composite, which tracks the performance of 20 of the most liquidly traded currencies versus the U.S. dollar.
2Sources: Bloomberg, WisdomTree, as of 11/30/14.
3Global equities proxied by MSCI ACWI Net; U.S. bonds proxied by the Barclays U.S. Aggregate Index.
4Source: Bloomberg, as of 11/30/14.
Important Risks Related to this Article
Diversification does not eliminate the risk of experiencing investment losses. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.