Within the curriculum several recurring tenets are presented - investing in emerging markets is of value as a diversifying asset class but, oh wait - not really - because when you really need the correlation increase exactly when you need the diversifying protections - but oh wait again! - realize that this is a statistical anomolie of sorts and so dont be fooled by this it has its diversification benefits Schweser dinged my on a response when a place to much weight on the latter premise and said that it is a useful diversifier – any one have a read on how CFA would interpret this? this or is this just one of those between the lines 6th sense interpretations that can only be made on exam day - and only be solved by the majesty of the CFA truth sayer!
investing in emerging market has its risk and incentives both. looking first at incentives, emerging country has higher growth (read return) potential than developed countries due to increased application of technology, lower labor costs etc. and it also has low correlation with developed markets so it provides both return enhancement and diversification potential. now looking at risk of investing in emerging markets, higher returns is always accompanied by higher risk. higher risk can come in the form of ineffecient institutions, undeveloped infrastructure or uneducated workforce (also any other). w.r.t. higher correlation during crisis periods, it is also stated that correlation increases during periods of increased volatility due to statistical properties of correlation (as characterstic of crisis period) and it may not represent an increase in “true” correlation.