TRUE OR FALSE

The inclusion of emerging markets in a portfolio should result in higher expected returns due to their low correlation with developed markets

I’d say False. The higher expected return is not due to low correlations with developed markets. The low correlation provides the diversification benefits and on a separate note, emerging markets tend to have higher returns than developed markets.

KEY Point Here to remember. "**IN TIMES OF DISTRESS, VIRTUALLY ALL MARKETS ARE CORRELATED***

EM results in higher returns - TRUE Reason, EM markets are not fully integrated thus securities of the same risk will not be priced the same across markets. EM stocks will be priced based on the local risk and not at the risk level when added into a portfolio i.e. EM risk can be diversified away, to an extent. Hope it makes sense. Besides all this CFA gibberish, think about it - which markets have more “oomph”? France, Italy, UK, Canada, Spain OR BRIC? US and Nordic countries are a little more different.

IH8FSA Wrote: ------------------------------------------------------- > KEY Point Here to remember. > > "**IN TIMES OF DISTRESS, VIRTUALLY ALL MARKETS ARE > CORRELATED*** that is an aberration based on how the correlation is calculated Trymybest : that is what i thought too , however Analythis is correct . I think this question is poorly worded . As per schweser : Low correlations between markets reduce volatility, but do not directly affect the level of expected return. The inclusion of emerging markets should result in higher expected returns due to their higher expected economic growth, not because they have low correlations with developed markets.

Which reading/pg # is this statement taken from in Schweser Rudeboi?

I would add my 2 cent: I think the risk-adjusted return is higher by includng EM.

Qbank Question ID#: 13346 View Associated LOS: SS 17 R 45 LOS g

i think it is poor wording from Qbank.

lower correlation will only reduce the risk

Rudeboi Wrote: ------------------------------------------------------- > IH8FSA Wrote: > -------------------------------------------------- > ----- > > KEY Point Here to remember. > > > > "**IN TIMES OF DISTRESS, VIRTUALLY ALL MARKETS > ARE > > CORRELATED*** > > that is an aberration based on how the correlation > is calculated What does this mean? My take to this: according to Schweser, correlation has been found to be increasing during distress periods. > As per schweser : Low correlations between markets > reduce volatility, but do not directly affect the > level of expected return. The inclusion of > emerging markets should result in higher expected > returns due to their higher expected economic > growth, not because they have low correlations > with developed markets. agree. - sticky

STATISTICAL ABIRATION !!!

Rudeboi Wrote: ------------------------------------------------------- > IH8FSA Wrote: > -------------------------------------------------- > ----- > > KEY Point Here to remember. > > > > "**IN TIMES OF DISTRESS, VIRTUALLY ALL MARKETS > ARE > > CORRELATED*** > > that is an aberration based on how the correlation > is calculated > > It’s absolutely not and those piece of crap articles that CFAI has you read are simply wrong with the really obvious error that they are including observations based on knowing the observation (i.e., no mathematician, statistician, or even decent economist wrote those articles). The way that correlation is calculated is by using the maximum likelihood estimator for normality. There are two possibilities: a) It’s calculated right and there are no aberrations because MLE’s in normality are as plain vanilla as statistics comes; or b) correlation is not a meaningful measure of association because it’s based on normality which isn’t so. That bit about correlation is among the stupidest things in the curriculum (along with purchase vs pooling, GIPS, most of ethics…)

We can dispute (and rightfully so) all we want about what the CFAI makes us study, but that’s all we can do given that we are at their mercy and we voluntarily chose to enroll in this program. This is a vague question, dont think we"ll see such ones on the exam.

sid3699 Wrote: ------------------------------------------------------- > This is a vague question, dont think we"ll see > such ones on the exam. Famous last words…

:)) am an optimist and still think some one at the CFAI has some good in him/her. On a serious not though, given the information in the question, answer can go both ways.

Let’s hope. My thought on the question: If you have two assets, each with some return and standard deviation, with a correlation of 0.5, you can determine the return and standard deviation of portfolio if you know the weights. Now, if those weights don’t change and you lower the volatility to 0.2, the return doesn’t change, but the standard deviation does.