Higher Correlations and Diversification Challenges to be Discussed on Sept. 6th at RMC Europe

Over the past decade, and particularly during the 2008 financial crisis, many investors became more concerned about the fact that correlations of returns among many different asset classes have been rising (particularly during stressful market conditions, and this fact makes it more challenging to construct well-diversified portfolios. On September 6th there will be a presentation on “Mapping Cross-asset Financial Stress and Hedging Macro Portfolios” at CBOE’s inaugural Risk Management Conference – Europe.


For background information, below is a listing of headlines for pieces that covered the topic of diversification during the 2008 crisis.

Bigda ,Carolyn. “Crisis Rains On Diversification Parade; For Long-Term Investing, Managers Still Optimistic About Foreign Stocks.” Chicago Tribune (Nov 9, 2008). pg. 4.

Clary, Isabelle. “Managers Turning to Futures, Options to Counter Volatility.”

Pensions & Investments (March 31, 2008).

Cui, Carolyn. “Commodities Zig; Stocks Do, Too; Parallel Drops Undermine Oil and Grains In Their Roles as Alternative Investments.” Wall Street Journal (Oct 17, 2008). pg. C.1.

Israelsen, Craig L. “All Together Now; Analyzing Correlation Patterns Shows That Some Assets Are Not Providing Hoped-For Diversification.” Financial Planning (April 2009) pg. 67.

Jacobs, Stevenson. “Battered Hedge Funds Brace for More Pain” Washington Post (Jan. 18, 2009) pg. F05.

Karmin, Craig. “Calpers Has Worst Year, Off 23.4%.” Wall Street Journal (July 22, 2009) pg. C3.

Lauricella, Tom. “No Diversification: How Bond Funds Let Investors Down.”

Wall Street Journal (June 1, 2009) pg. R.1.

Leibowitz, Martin L. and Anthony Bova. “Diversification Performance and Stress-Betas.” The Journal of Portfolio Management (Spring 2009).

Lim, Paul. “25 Years of Conventional Wisdom, Down the Drain.” New York Times (Jan 4, 2009). pg. BU.4.

Markowitz, Harry. “Crisis Mode: Modern Portfolio Theory Under Pressure.” The Investment Professional (Spring 2009).

MarksJarvis, Gail. “Diversification Not Always Insulation.”Chicago Tribune (Feb 1, 2009).

Mcgee, Suzanne. “The Perfect Alternative; In A Bear Market, Finding Assets With A Reliably Negative Correlation To Stocks And Bonds Is All The More Crucial-And All The More Difficult.” Financial Planning (Dec. 2008) pg. 60.

Scism, Leslie, and Daisy Maxey. “No Place to Hide; Investors Have Seen Even ‘Safe’ Stock and Bond Funds get Hammered; No Wonder They’re So Spooked.” Wall Street Journal (Nov 3, 2008) pg. R.1.

Shinkle, Kirk. “Why Plain-Vanilla Portfolios Fall Short; Today, Diversification Means More than Just Mixing Stocks, Bonds, and Cash.” U.S. News & World Report (Jul 1, 2009) pg. 70.


Below is a CBOE chart showing the rolling one-year correlations of weekly returns for four indexes vs. the S&P 500® Index (SPXTM) over a 41-year period. Note that for three of the four indexes (Russell 2000, MSCI EAFE, and S&P GSCI, their correlations (vs. the S&P 500) have risen in recent years. As noted in the chart, the correlations of weekly returns for four indexes vs. the S&P 500 over the one-year period ending August 3, 2012, were –


  • 0.96 Russell 2000 Index (for small-cap stocks)
  • 0.88 MSCI EAFE Index (in US $) (for non-US developed-markets stock indexes)
  • 0.69 S&P GSCI (for commodities)


On September 6th Abhinandan Deb, Director of Equity Derivatives Research – Europe for Bank of America Merrill Lynch, will deliver a presentation on “Mapping Cross-asset Financial Stress and Hedging Macro Portfolios” at CBOE’s inaugural Risk Management Conference – Europe.

Among the subjects expected to be covered by Abhinandan Deb are –

  1. Correlations across markets remain at highs;

2. Cross-asset derivatives markets continue to have a wide range of views despite overall financial market risk (GFSI) being low.


Volatility indexes www.cboe.com/volatility

CBOE Volatility Index® (VIX®) (with put-call ratios, CFE, charts, bibliography, etc.) www.cboe.com/VIX

Papers on Income Enhancement and Tail Risk Management www.cboe.com/benchmarks

CBOE Risk Management Conference in Ireland – Sept. 5 – 7 2012 www.cboermc.com/Europe