Why is the correlation equal to 1 in the ”risk premium with complete segmentation” calculation? I understand that the correlation is 1 because of the asset class’s correlation with the local market, but I don’t understand the reasoning behind it.
When complete integration is assumed, the correlation value represents correlation between the asset call and the GIM. However, when complete segmentation is assumed, the correlation value represents the asset class’s correlation with the local market, which is 1. Why isn’t the correlation just 0 as the market is completely segmented?
If you're the first out the door, that's not called panicking
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.