Prof. Christoffersen on Rethinking the Meaning of Diversication
Diversification is one of the time-honoured tenets of investing - the "don't put all your eggs in one basket" notion that spreading stock investments across countries and regions will reduce risk. But faith in diversification was one of the many casualties of the financial meltdown, as even the most diversified stock portfolios took a big hit. Earlier this month, four McGill academics released a surprising paper examining the degree to which different stock markets operate in tandem. To the extent that stock markets move in lock step, downside protection in declining markets is minimal… In a conversation with Peter Christoffersen, one of the study co-authors, he said: "There's been a lot of movement up and down along the way. But if you strip out the noise, correlations between developed markets have nearly doubled to 0.8 today from 0.4 in the early 1990s...
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