what is considered low correlation? referencing 2007 AM: inflation protected bonds : US Corp Bonds = .71 inflation protected bonds: US gov bonds = .80 the exam says that this low correlation justifies inflation prot. bonds as a separate asset class. is .80 really low enough to be considered a separate asset class?
boston it is disucussed in curriculum as an example of an asset that should be a separate asset class. Basically a gimme if you bother to read the books 
i thought the same thing – seems high, but from the answer I’d have to agree they think 80% is low enough to be considered “diversifying”. there is a specific blue box in the materials that talks about justifying TIPS as a separate asset class. damn if i can remember any of the details.
- heterogeneity of all TIPs instruments 2) Relatively low correlations with other classes 3) Affected by the different sets of economic conditions (real rates) vs nominal bonds (nominal rates)
i remember the tips thing…i actually got the question right on the practice exam. .8 just seems high to me.
Isn’t anything below 1 diversifying?, even though .8 is high, perhaps it still has sufficient diversification effect? I’m not sure about this but I think so.
i just finished reading the answer to part b where they say corp and gov are the same asset class because of a high correlation = .85. I know the aren’t separate asset classes but what I’ve learned from this is that you can define <=.80 = low, >.85 = high.
that’s a pretty fine hair for them to split… does that qualify as overconfidence bias?
Same thing as for willingness to take risk SF > 14% - Above average. SF < 12% - below average.