The correlation bubble

摘要

One of the primary ways investors attempt to reduce risk and volatility within their portfolio is by combining different asset classes and sector exposure. Portfolio theory would dictate that investors strategically incorporate asset classes with low correlations to reduce portfolio volatility as measured by standard deviation. Examples of asset classes would be Large Cap Canadian Equities, Commodities, Real Estate, Government Bonds, High Yield Bonds, Emerging Market Equities, Hedge Funds and so on. Since the "Great Recession" of 2008, macro volatility has increased significantly, and combined with the globalization of economies, correlations among asset classes, stock markets and sectors, is on the rise.