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The article presents a research study that aims to determine if mean-variance optimization over sector funds in the construction of fund-of-funds portfolios can provide consistent performance relative to the performance of custom benchmarks. Data and methodology are presented including the ex ante portfolio-input parameter estimation technique and the minimum-variance portfolio (MVP) technique used in the study. Performance results are discussed as summarized in two exhibits.

Using 1,966 daily observations since the introduction of the euro, we apply cointegration and error correction tests to examine information transmission in the major world money markets as represented by the domestic CD markets and the Eurocurrency market for the US dollar, euro, Japanese yen, and British pound sterling. Our inter-market tests show a high degree of integration and interdependency among inter-market interest rates. Our intra-market results show that $ LIBOR and LIBOR rates drive LIBOR and £ LIBOR. Application of multivariate test procedure and long-memory components technique confirms and reinforces our intra-market findings that the system of four LIBOR rates is fully integrated (i.e., three cointegrating vectors), with the single common trend driven by $ LIBOR and LIBOR. These results are consistent with the strength of the dollar and yen relative to the pound sterling and the euro during the developing world financial crisis in late 2008. [ABSTRACT FROM AUTHOR]

We develop a model that shows that the Eurocurrency market risk premium is comprised of two components: sovereign risk and credit risk. On the basis of our model, we construct hypotheses that explain the differences in risk both within and across Eurocurrency trading centers. We use daily LIBOR, SIBOR, and TIBOR benchmark rates for several Eurocurrencies to empirically test the hypotheses. Our inter-market test results indicate a strong positive relationship between pairs of risk premia. Differences in inter-market risk premia are explained by differences in: sovereign risk between host countries, and Eurobank credit quality. Our intra-market tests show a weak positive relationship between pairs of risk premia. Differences in intra-market risk premia are explained by differences in: sovereign risk between the countries issuing the underlying currencies, Eurobank credit quality, and domestic bank credit quality. [ABSTRACT FROM AUTHOR]