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Research

When Diversification Fails

Rob Panariello, CFA, FRM, CAIA, Associate Director of Research, Multi-Asset

One of the most vexing problems in investment management is that diversification seems to disappear when investors need it the most. We surmise that many investors still do not fully appreciate the impact of extreme correlations on portfolio efficiency—in particular, on exposure to loss. We take an in-depth look at what drives the stock-to-credit, stock-to–hedge fund, stock-to–private asset, stock-to–risk factors, and stock-to-bond correlations during tail events. We introduce a data-augmentation technique to improve the robustness of tail correlation estimates. Finally, we discuss implications for multi-asset investing.

Research

When Diversification Fails

When Diversification Fails

Important Information
The views contained herein are from Sebastien Page and Robert Panariello, were published as of Q3 2018, and may have changed since then.

The charts and tables are shown for illustrative purposes only. MSCI Index returns are shown with gross dividends reinvested; an investment cannot be made directly in an index.

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Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein were as of Q318 and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

USA – Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202. For Institutional Investors Only.

When Diversification Fails, Financial Analysts Journal, copyright © CFA Institute, http://cfainstitute.org/, reprinted by permission of Taylor & Francis Ltd, http://www.tandfonline.com on behalf of CFA Institute. No reproduction or redistribution permitted without prior authorization.

© 2019 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

201903-788198

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