Improved covariance relations across the portfolio’s exposures resulting in greater diversification benefits of international investment. True or false ? What does “improved covariance relations across the portfolio’s exposures” mean ? What is the “improved covariance relations” ?

in my understanding, “improved covariance relations” means lower portfolio covariance as a result, resulting in greater diversification benefits the statement is true

angelakitten Wrote: ------------------------------------------------------- > in my understanding, “improved covariance > relations” means lower portfolio covariance > as a result, resulting in greater diversification > benefits > > the statement is true Yes, the statement is true according to the solution. But I have some questions : 1. Usually we use “correlation” to judge the diversification, why covariance is used here ? 2. “Improved covariance relations” means lower correlation ? Actuall correlation is becoming higher & higher among countries worldwide (though slowly.

correlation can be calculated from covariance and assets standard deviation COV(X,Y)/(SD X *SD Y)=correlation covariance lower–>correlation–>greater diversification

as i understand it, improved covariance seems to be suggestive of the fact that now that a country is integrated wih global economy, its total risk is reduced as measured by its covariance with global economy. earlier, without integration, its total risk was measured by its variance which was greater than covariance measure.

angelakitten Wrote: ------------------------------------------------------- > correlation can be calculated from covariance and > assets standard deviation > > COV(X,Y)/(SD X *SD Y)=correlation > > covariance lower–>correlation–>greater > diversification So you mean : covariance lower --> correlation lower --> greater diversification ? I agree. But actuall correlation is becoming higher & higher among countries worldwide (though slowly), due to more & more integrated.