You have a fairly large portfolio of U.S. stocks and bonds. You meet a financial planner at a
social gathering who suggests that you diversify your portfolio by investing in emerging market
stocks. Discuss whether the correlation results in Exhibit 3.10 support this suggestion.
Since we don't know what Exhibit 3.10 shows, we can't help you.
How many years, correct to 1 decimal place, will it take for K54,321 invested at a compound interest of 13% per annum, to amount to K98,765
To determine whether the correlation results in Exhibit 3.10 support the suggestion of diversifying your portfolio by investing in emerging market stocks, we first need to understand what correlations are and how they can help in portfolio diversification.
Correlation is a statistical measure that quantifies the relationship between two variables. In the context of investments, it measures how closely the price movements of different assets move together. A positive correlation means that the assets tend to move in the same direction, while a negative correlation means they tend to move in opposite directions.
Exhibit 3.10 likely provides a table or graph showing the correlations between various assets, such as U.S. stocks, U.S. bonds, and emerging market stocks. By looking at these correlation values, we can assess how closely the returns of these assets are related.
If the correlations between U.S. stocks and bonds, and emerging market stocks are low or negative, it suggests that these assets have different return patterns, which can be beneficial for diversifying a portfolio. Diversification is the strategy of spreading investments across different asset classes to reduce the risk of loss from any single investment.
However, if the correlations between U.S. stocks and bonds, and emerging market stocks are high or positive, it indicates that these assets tend to move in the same direction, reducing the potential benefits of diversification. In such cases, adding emerging market stocks to your portfolio may not provide the desired diversification benefits.
To support or refute the financial planner's suggestion based on the correlation results in Exhibit 3.10, you need to examine these correlations. If the correlation between U.S. stocks and bonds, and emerging market stocks is low or negative, it may be favorable to add emerging market stocks to diversify your portfolio. On the other hand, if the correlation is high or positive, it may not be an effective strategy for diversification.
Remember that correlation is just one factor to consider when diversifying a portfolio. Other aspects, such as your risk tolerance, investment goals, and market conditions, should also be taken into account. It is advisable to consult with a financial advisor who can provide personalized advice based on your specific circumstances.