Emerging Markets Quiz

Statement 1 : Improved Covariance relations across the protfolio exposures resulting in greater diversification benefit. ( In context of adding International Securties) True or false Statement 2 :Best Diversification vehicle will be asset with high volatility and negative correlation with the existing portfoilo True or False Statement 3 : During period of stress the true correlation indeed increases between markets (exclude biases) True or False

  1. True - covariance is lower than stand alone variance 2. Going to go with False - low or negative correlation but volatility? wouldn’t think you’d particluarly want high volatility 3. True - in crises diversificatio beefits are reduced as correlations increase

False True False (increased correlation is due to statistical properties of correlation measure that shows an increase due to increased volatility despite any increase in true corr measure)



captain … can we have the answers

  1. False - Improved covariance - reduces diversification benefits 2. True 3. False - level3aspirant
  1. True (Unless Improved covariance means higher covariance, in which case False) 2. False (No reason to want high vol) 3. True (Even after removing Statistical bias)


F - The greater the covariance, the greater the correlation. You want assets with low covariance or correlation to each other. If not, you are not diversified. T - I’m guessing here, not so sure about volatility but with high vol. and low correlation, this could be a great diversifier. (but so could low vol, low correlation with a steep positive return vector). T - True - at the end of the day, there is one asset class called leveraged paper assets and they all move in tandem as people get margin calls.

False (Assuming “Improved Covariance” implies Higher Positive Covariance) False (Why would we want volatility? i.e. RISK!) True (Correlation increases steeply during crisis…As observed in the last 2 years!)

True True False (volatility increases, not true correlation)

We’re shit at this

T F T ?

F - Assuming improved means higher T - Higher vol combined with neg correlation results in greater reduction in overall pf vol. F - Guessed this one. God knows what true correlation does, but observed tend to increase due to increase vol.

All three of them are true. T- covar better than stand-alone variance. T- you want higher vol and negative correlation to give you a smaller overall standard deviation (as mentioned right above me) T- in periods of crises, as we see now, we have the notion of “contagion” - which is when otherwise uncorrelated or low-correlated markets become very correlated. When a crisis hits, like the issue now with Europe, all European Markets, Asian, and U.S start falling.

False because higher covariance does not improve diversification True False- they say that true correlation does not increase but it is a statistical aberration

false true false

False - Increase in covariance = increase in standard deviation True False - Not proven