Diversification revisited

Many investment companies hold diversified asset portfolios and frequently try to mirror or outperform a market index for each asset class such as stocks and bonds. As Wibaut and Wilford (2009) show, often the same issuers appear in each of those indices and this may lead to undesirable results such as during a crisis period. Our research further explores the topic of diversification with a special focus on the financial crisis period of 2007 through 2009. Our results indicate that there is benefit in terms of correlations from holding bond and stock portfolios. Interestingly, these findings show the benefit is most pronounced during times of market stress.

We re-examine the benefits of diversification. Using stock and bond portfolios, we study co-movements in portfolio returns. We find that correlations between returns decrease during times of market distress. As a result, we can refute the recent concerns relating to diversification's death.Figure optionsDownload as PowerPoint slide