So even though correlations increase when markets are volatile, the increase is a statistical problems and it is still a good idea to invest in international markets? Is that the gist of this section?
That’s one side of the argument… I think the gist of this section is that there are two sides to this argument that are both valid and charterholders should recognize this in their evaluations. Other side of argument is: Aren’t times of volatility when you want correlations to be low for diversification to truly work? I don’t think there is a true conclusion for the reading, the point is to know the arguments of each side.
I think they wanted to introduce the topic of Contagion - when negative news affects other international markets, correlations go up at the worst time. You want correlations between markets to be low to lower risk via diversification, but correlations rise in when markets are volatile, the exact time you don’t want them to rise. It doesn’t say this is a reason not to invest in international markets, its just stating the possible consequences. There was also an argument in the Stalla readings that said in actuality, some studies showed that correlations did not in fact increase by any significant amt during times of turmoil.
SS12, Reading 35 tells a similar story, but no examples and no EOC questions in the curriculum. But Schweser added at least 5 “For the exam” blue boxes and even more Professor’s notes in this short Reading.
My take: - Correlations do increase in times of volatility, but the effect is often exaggerated by proponents of this argument. - The apparent increase in correlations is a result of the mathematical shortcomings of the correlation measure, and is also skewed by the time period in which one chooses to measure it. - Correlations are actually quite stable in the long run.
R27 : EOC Q12 (CFAI Text Vol 3 P.389~390) Attribute 2 is correct or wrong ? I am much confused !