Portfolio balance approach

A view of exchange rates in which investors hold a country's assets only at the right expected return. Persistent fiscal deficits add to their supply, so the currency eventually weakens or yields must rise.

Where you will meet it

Portfolio balance approach appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain what fiscal and monetary policy may do to exchange rates
  CFA Level II · Economics

  “The portfolio balance approach adds that persistent fiscal deficits can weaken a currency over time, if investors demand a lower price or higher return to hold the growing debt.”

• Set out the main approaches used to forecast currency movements
  CFA Level III · Asset Allocation

  “The portfolio balance approach says investors demand higher returns to hold growing stocks of a country's assets, so rising government debt can weaken the currency.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with P · Glossary