Open Access. Powered by Scholars. Published by Universities.®
Articles 1 - 4 of 4
Full-Text Articles in Business
Correlation Concerns, Steven D. Dolvin
Correlation Concerns, Steven D. Dolvin
All Chapters
Modern Portfolio Theory (MPT) is based on the notion that diversification creates better (a.k.a., more efficient) portfolios. The benefit of the diversification stems from less than perfect correlations between asset classes. However, during times of extreme stress, and even in recent years with market integration, correlation values have increased. This calls into question whether diversification will bring the full benefit that it is expected to provide. See article here, Bloomberg.
Increased Leverage = Less Risk?, Steven D. Dolvin
Increased Leverage = Less Risk?, Steven D. Dolvin
All Chapters
All else equal, the use of leverage increases investment risk. But, can it ever have the opposite effect? Investors using the so-called risk parity trade believe the answer is yes. Under this approach, a portfolio is built using equity and debt, but the debt is purchased using leverage. The strategy is based on two key points: (1) equity is more volatile than debt and (2) debt returns are negatively correlated to equity returns. Thus, with leverage, the debt returns are in effect more volatile. When combined, the negative correlation creates a less risky portfolio as the equity and debt returns …
Low Volatility Etfs, Steven D. Dolvin
Low Volatility Etfs, Steven D. Dolvin
All Chapters
A recent trend is the development of low volatility funds, including both ETFs and mutual. These funds invest in a subset of a specified index, selecting only those stocks with low price volatility (which may be identified by a low beta). There is not sufficient history to gauge the performance of such funds, but two issues are worth noting. First, given the impact of volatility on compounded returns (i.e., geometric averages are lower than arithmetic averages), low volatility funds should have an advantage, particularly in otherwise volatile markets. Second, value funds may outperform over long periods (albeit not every period), …
Is Diversification Dead?, Steven D. Dolvin
Is Diversification Dead?, Steven D. Dolvin
All Chapters
Diversification (primarily based on asset correlation) is a key component of Modern Portfolio Theory (MPT). However, the recent financial crisis illustrated an increase in correlation across asset categories. Thus, many debate whether diversification still helps. Even with increasing correlations, diversification still provides benefit (possibly just not as much). However, the more relevant issue is that increasing correlation across the typical asset categories suggests that diversification is now more critical across "non-typical" categories -- such as commodities, hedge funds, and private equity funds. .