markets. Many investors often choose to diversify
their portfolios with
international stocks.
However, there is also a noticeable correlation across the different global
financial markets. This correlation is clearly
visible not just across
European markets but also emerging markets from around the world. There
is also a clear correlation between equities and fixed income markets, which
are generally the hallmarks of diversification.
This correlation is actually a challenge and
is probably a result of the
relationship between structured financing and investment banking. Another
factor that contributes to this correlation is the rapid growth and popularity
of hedge funds. Take the case where a large international organization such
as a hedge fund suffers losses in a particular asset class.
Should this happen, then the firm may have to dispose
of some assets across
the different asset classes. This will have a multiplier effect as numerous
other
investments, and other investors will, therefore,
be affected even
though they had diversified their portfolios appropriately. This is a
challenge that affects numerous investors who are probably unaware of its
existence. They are also probably unaware of how it should be rectified or
avoided.
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