Sources of Return within an Emerging Markets Fixed-Income and Foreign Exchange Portfolio

Abstract

Over the past decade, emerging market investments have increasingly become the focus of investor interest.Numerous academic and practitioner studies have emphasized the potential for excess return and risk reduction when adding emerging market investments to a traditional portfolio. Much of the research, however, has focused on empirical analyses rather than on highlighting the long-term structural arguments for emerging market investments. Moreover, much of the research has tended to focus on the equity markets rather than on other forms of emerging market investment, such as fixed income and foreign exchange (FX).This practitioner note introduces the reader to the non-equities emerging market (EM) investment universe,describes a prototypical EMfixed-income/FX portfolio, and quantitatively works out the expected annualized returns on such a portfolio, distinguishing between beta and alpha as the sources of returns. <b>TOPICS:</b>Fixed income and structured finance, currency, emerging, performance measurement