w*(t-l) w\{t-\) \ts/Ht)-eb(t)\ <19-"") In the asset grouping approach,12 the forward premium effect is defined as: (Portfolio weight - Benchmark weight) X (Expected currency return - Average premium in benchmark portfolio). In this context (i.e., when measuring the forward premium effect), the currency management effect is defined as: [(Portfolio weight -Benchmark weight) X (Currency surprise - Total benchmark currency surprise)] + (Forward contract adjustment). An approach that incorporates the currency management and forward premium effect such as this one will help investors measure more accurately the value added by active management of individual stocks, of countries, and of currency hedges in an international portfolio. Currency Contributions to Return For a given currency, compute the exposure of each position to that currency. A position will have an exposure of one if it is exposed to a currency, zero otherwise. Let y (t) be the ?zth security's exposure to the ;th currency. The ;th currency's contribution to the managed portfolio's total return is N ^yn^(t)wUt-l)Enj(t) The ;th currency's total return as computed from the managed portfolio's holdings is N N X Jn,i (t)wt (t - l)Enj (t) + £ ySi/ (t)wt (t - 1) n=\ n=\ Industry and Sector Contributions to Return Industry and sector contributions are computed in the same way as country contributions and returns. Let Ins{t) represent the nth position's weight in the 5th industry. Typically, I {t) takes a value of one if the company associated with the nth position is in the 5th industry, zero otherwise. The 5th industry's contribution to the managed portfolio's total return is N 5X,(*K('-i)K*(') 71=1 Its contribution to the portfolio's local return is N ^hJt^Kt-l^it) n=\ Industry returns are computed as follows: 12See Brinson and Fachler (1985) and Ankrim and Hensel (1994) for details.