Download or read book Correlation Return Gaps and the Benefits of Diversification written by Meir Statman and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Correlation is the common indicator for the benefits of diversification, but it is not a good indicator. This is for two reasons. First, the benefits of diversification depend not only on the correlations between returns but also on the standard deviations of returns. Second, correlation does not provide an intuitive measure of the benefits of diversification. Return gaps are better indicators. Return gaps are the difference between the returns of two assets or between two portfolios. For example, the estimated 12-month return gap between the Samp;P 500 Index and the Russell 2000 Index and during February 2002 - January 2007 was 8.90%, implying that investors who concentrated their portfolios in one index or the other should have expected to lead or lag investors who diversified between the two in equal proportions by 4.45%. The realized 12-month return gaps ranged from 0.1% to 28.7%. It is hard to deduce these figure intuitively from the relatively high 0.82 correlation between the two. Similarly, it is hard to deduce intuitively from the relatively high 0.86 correlation between the Samp;P 500 and EAFE Indexes that their estimated 12-month return gap was 6.86% and their realized 12-month return gaps ranged from 1.8% to 23.0%. Moreover, the figures belie any claim that these assets' risk-reduction benefits have largely vanished.
Download or read book Global Diversification written by Meir Statman and published by . This book was released on 2005 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: Correlations between the returns of U.S. stocks and international stocks were higher recently than in the past, reaching 0.86 during the 60 months ending in December 2003. Today's investors note the high correlations between U.S. and international stocks and doubt the benefits of global diversification. We argue that the benefits of global diversification remain high and that the correlation between U.S. and international stocks is a misleading measure of the benefits of global diversification. This is for two reasons. First, the benefits of global diversification depend not only on the correlation between the returns of U.S. and international stocks but also on the standard deviations of these returns. Second, we tend to have poor intuition about the link between correlation and the benefits of diversification. A 0.86 correlation seems high enough to eliminate the benefits of diversification, but even correlations much higher than 0.86 are associated with substantial benefits. Dispersion of returns is a better measure of the benefits of diversification because it accounts for the effects of both correlation and standard deviation and because it provides an intuitive measure of the benefits of diversification. We present the relationship between correlation, standard deviation and dispersion.
Download or read book What Measures the Benefits of Diversification written by Meir Statman and published by . This book was released on 2005 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: While correlation is the common indicator of the benefits of diversification, it is not a good indicator. This is for three reasons. First, diversifiable risk depends not only on the correlations between stock returns but also on the standard deviations of stock returns. Second, correlation does not provide an intuitive indicator of the benefits of diversification. Third, expected diversifiable risk, estimated from correlations and standard deviations, is biased when the distribution of the returns of stocks around the mean return of all stocks is not normal. We know diversifiable risk as unsystematic risk, tracking error and dispersion. We analyze diversifiable risk in portfolios of U.S. stocks during 1980-2004.
Download or read book Correlation of International Stock Returns and the Benefits from Diversification written by Chue Timothy K. and published by . This book was released on 2000 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Measuring the Benefits of Diversification and the Performance of Money Managers written by Meir Statman and published by . This book was released on 2015 with total page 11 pages. Available in PDF, EPUB and Kindle. Book excerpt: While correlation is the common measure of the benefits of diversification, it is not a good measure. This is for two reasons. First, the benefits of diversification depend not only on the correlations between stock returns but also on the standard deviations of stock returns. Second, correlation does not provide an intuitive measure of the benefits of diversification. Dispersion is a better measure of the benefits of diversification. Dispersion is the standard deviation of the returns of stocks around the mean return of all stocks. We know dispersion as diversifiable risk and as tracking error. We analyzed the returns of the S&P 500 stocks during the years 1980-2004 to show how dispersion measures the benefits of diversification and how to account for dispersion in the assessment of the performance of money managers.
Download or read book Correlation Dynamics and International Diversification Benefits written by and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Finance for Normal People written by Meir Statman and published by Oxford University Press. This book was released on 2017 with total page 489 pages. Available in PDF, EPUB and Kindle. Book excerpt: Finance for Normal People teaches behavioral finance to people like you and me - normal people, neither rational nor irrational. We are consumers, savers, investors, and managers - corporate managers, money managers, financial advisers, and all other financial professionals. The book guides us to know our wants-including hope for riches, protection from poverty, caring for family, sincere social responsibility and high social status. It teaches financial facts and human behavior, including making cognitive and emotional shortcuts and avoiding cognitive and emotional errors such as overconfidence, hindsight, exaggerated fear, and unrealistic hope. And it guides us to banish ignorance, gain knowledge, and increase the ratio of smart to foolish behavior on our way to what we want. These lessons of behavioral finance draw on what we know about us-normal people-including our wants, cognition, and emotions. And they draw on the roles of these factors in saving and spending, portfolio construction, returns we can expect from our investments, and whether we can hope to beat the market. Meir Statman, a founder of behavioral finance, draws on his extensive research and the research of many others to build a unified structure of behavioral finance. Its foundation blocks include normal behavior, behavioral portfolio theory, behavioral life-cycle theory, behavioral asset pricing theory, and behavioral market efficiency.
Download or read book Covariance and Correlation in International Equity Returns written by Rachel A.J. Pownall and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Benefits to portfolio diversification depend crucially on correct correlation estimates, hence it is of great importance to both risk management and portfolio optimisation that the exact nature of the correlation structure between international financial assets is understood. Recent discussion on the correlation of international equity returns has focussed on the issue of whether extreme movements in international financial markets are more highly correlated than usual returns. This implies a reduction in the benefits from portfolio diversification since extreme returns are more likely to occur with greater simultaneity. Using the Value-at-Risk methodology we are able to measure the quantile correlation structure implicit in international asset returns in a simple manner without having to resort to fully parametric modelling. We illustrate that the extraction of the quantile covariance structure from this quantile correlation structure is non-trivial. Using daily data on stock market indices for a variety of countries we observe how the correlation and covariance structure changes as we move into the tails of the return distribution. We find for extreme stock market movements the benefits to international diversification are significantly curtailed even after discarding spurious correlation changes.
Download or read book Correlation of International Stock Returns and the Benefits from Diversification written by Timothy K. Chue and published by . This book was released on 2000 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Portfolio Diversification written by Francois-Serge Lhabitant and published by Elsevier. This book was released on 2017-09-26 with total page 276 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio Diversification provides an update on the practice of combining several risky investments in a portfolio with the goal of reducing the portfolio's overall risk. In this book, readers will find a comprehensive introduction and analysis of various dimensions of portfolio diversification (assets, maturities, industries, countries, etc.), along with time diversification strategies (long term vs. short term diversification) and diversification using other risk measures than variance. Several tools to quantify and implement optimal diversification are discussed and illustrated. Focuses on portfolio diversification across all its dimensions Includes recent empirical material that was created and developed specifically for this book Provides several tools to quantify and implement optimal diversification
Download or read book Sustainability of the Theories Developed by Mathematical Finance and Mathematical Economics with Applications written by Wing-Keung Wong and published by MDPI. This book was released on 2020-12-15 with total page 382 pages. Available in PDF, EPUB and Kindle. Book excerpt: The topics studied in this Special Issue include a wide range of areas in finance, economics, tourism, management, marketing, and education. The topics in finance include stock market, volatility and excess returns, REIT, warrant and options, herding behavior and trading strategy, supply finance, and corporate finance. The topics in economics including economic growth, income poverty, and political economics.
Download or read book Option Implied Correlations and the Price of Correlation Risk written by Joost Driessen and published by . This book was released on 2016 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by extensive evidence that stock-return correlations are stochastic, we analyze whether the risk of correlation changes (affecting diversification benefits) is priced. We propose a direct and intuitive test by comparing option-implied correlations between stock returns (obtained by combining index option prices with prices of options on all index components) with realized correlations. Our parsimonious model shows that the substantial gap between average implied (39.5% for S&P500 and 46.0% for DJ30) and realized correlations (32.5% and 35.5%, respectively) is direct evidence of a large negative correlation risk premium. Empirical implementation of our model also indicates that the index variance risk premium can be attributed to the high price of correlation risk. Finally, we provide evidence that option-implied correlations have remarkable predictive power for future market returns, which also stays significant after controlling for a number of fundamental market return predictors.
Download or read book The C F A Digest written by Institute of Chartered Financial Analysts and published by . This book was released on 2008 with total page 972 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Diversification Across Characteristics written by Erik Hjalmarsson and published by . This book was released on 2009 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study long-short portfolio strategies formed on seven different stock characteristics representing various measures of past returns, value, and size. Each individual characteristic results in a profitable portfolio strategy, but these single-characteristic strategies are all dominated by a diversified strategy that places equal weight on each of the single-characteristic strategies. The benefits of diversifying across characteristic-based long-short strategies are substantial and can be attributed to the mostly low, and sometimes substantially negative, correlation between the returns on the single-characteristic strategies.
Download or read book The Effect of Extreme Markets on the Benefits of International Portfolio Diversification written by Daniella Acker and published by . This book was released on 2013 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the effects of bull and bear markets on correlations between developed and emerging country equity returns, and on the benefits of combining international markets in a portfolio. We find that, contrary to most other studies, correlations fall in both bull and bear markets, although far more in the former; that emerging markets provide both additional diversification benefits for investors in developed markets and, especially, some protection in bear markets; the effects on portfolio performance of changes in correlations and standard deviations of returns in extreme markets are very small compared to the effect of changes in mean returns.
Download or read book Dynamic Copulas for Finance written by Valentin Braun and published by BoD – Books on Demand. This book was released on 2011 with total page 178 pages. Available in PDF, EPUB and Kindle. Book excerpt: The interactions of financial securities are crucial to determine possible portfolio losses. Although this fact is well understood, two questions remain: What causes changes in the dependence structure of financial assets? How can fluctuating dependencies be measured? The most common approach to identify the amplitude of financial assets' interactions are linear correlation coefficients. However, they fail to comprise shifts in the dependence structure. Alternatively, Copulas are a more flexible dependence measurement. This book focuses on the development of Dynamic Copula frameworks by implementing stochastic parameters into Archimedian and Elliptical Copula functions. In contrast to static correlation measures, the Dynamic Copulas are able to replicate unstable financial market interactions. Various Dynamic Copulas are applied to global stock, bond, commodity and exchange rate data to calculate the correlation time paths, which explain financial market reactions to economic shocks. Furthermore, the interactions of dependencies, volatility and returns are analyzed, to determine the efficiency of portfolio diversification in regards to wealth protection. Portfolio risks are estimated through Dynamic Copulas to demonstrate their abilities to replicate financial market interactions accurately. Additionally, this analysis reveals the impact of changing dependence intensities on the magnitude of possible portfolio losses. Finally, the Dynamic Copulas are utilized to allocate higher moment optimal portfolios. This examination emphasizes the effect of inaccurate correlation estimates on the portfolio choice.
Download or read book Nowhere Left to Hide Stock Market Correlation Regional Diversification and the Case for Investing in Africa written by Todd J. Moss and published by . This book was released on 2013 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: Investors diversify their portfolios to boost returns and manage risk. However, the benefits of diversifying across geographic regions are reduced if markets are highly correlated. This paper examines trends over the past two decades and finds, as expected from global market integration, that regional indices have become increasingly correlated with the S&P 500 index. Sub-Saharan Africa is also part of this trend, but is a notable laggard. For instance, in 2010 the correlation with the S&P500 was 0.86 for markets in Latin America, 0.79 for Asia, and just 0.31 for sub-Saharan markets (excluding South Africa). Additionally, correlations among African markets are generally very low. While there remain barriers to exploiting this trend, Africa's integration lag may present opportunities for investors seeking regional diversification -- and policymakers seeking to attract greater portfolio investment to the continent.
