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Singer-Terhaar approach

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? 

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the local market IS the global market in complete segmentation. 

StageRight wrote:

the local market IS the global market in complete segmentation. 

I know that but I don’t understand the reasoning. Why isn’t the correlation just zero, as a completely segmented market would have a zero correlation with the GIM. Why is the Asset Class vs GIM correlation in the fully integrated approach all of the sudden changed to Local Market vs Local Market correlation in the fully segmented approach? 

If you're the first out the door, that's not called panicking

Correlation of 1 means that there is no diversification benefit unlike zero correlation whereas there still might be diversification effect. I think that is the point with a market isolation (aka segmentation). 

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