be absent. . . ." The problem, however, is that in the real world exchange risk is present, and the domestic CAPM does not address the issue of currency risk. In practice, people around the world don't have a common consumption basket, and people measure the utility of their wealth in different units. The fluctuating relative values of the different currency units that investors use to measure their wealth, and the real risk those fluctuations create, have led a number of academics, including Fischer Black, to work on global generalizations of the domestic CAPM that address the issue of currency risk. Black's 1989 paper, "Universal Hedging,"2 is one of these generalizations. Unfortunately, as we will see, the global generalizations lead to a significant amount of complexity relative to the domestic CAPM. Although the math is complex, we will nonetheless push forward. Our feeling is that these models do lead to some important insights, in particular into issues such as what is the optimal degree of currency hedging (which, of course, was exactly Black's original focus). But for our purposes, an even more important benefit is that the Universal Hedging equilibrium provides a starting point for managing global portfolios. Black made a number of simplifying assumptions relative to earlier versions of what is known as the "international CAPM," and we will ultimately focus on his version of the global equilibrium model. Black was surprised, and delighted, when he realized that under a particular set of assumptions the global CAPM equilibrium included the surprisingly simple result that all investors in all countries around the world should hedge the same significant fraction of their foreign currency exposure.3 It was because of this result that Black called his extension of the international CAPM "universal hedging." In Black's equilibrium, the degree of risk aversion of investors determines the fraction of the currency risk that should be hedged, and Black estimated that in equilibrium this fraction of currency that should be hedged is approximately 77 percent. In the decade after Black developed his result it became clear that his international equilibrium asset pricing model has many applications, only one of which is its insights on currency hedging. In fact, since the world is not in equilibrium and most investors do not hold market capitalization weighted portfolios, the "universal" hedging percentage does not generally apply as a portfolio prescription. However, by simplifying the international CAPM model and taking it seriously as a reference for expected returns, Black provided the intellectual framework from which many other applications, including the Black-Litterman global asset allocation model, have emerged. Black's international CAPM was certainly not the first globalization of the domestic CAPM (see, for example, Solnik (1974); Adler and Dumas (1983); Grauer, 2Black!s paper, "Universal Hedging: Optimizing Currency Risk and Reward in International Equity Portfolios," appeared in the Financial Analysts Journal, July/August 1989, pages 16-22. 3For Black's reflections on his work, see "How I Discovered Universal Hedging," Risk Management, Winter 1990.