The
Modern Portfolio Theory’s (MPT) propounder and famed economist Prof. Harry Markowitz, who bagged the Nobel Prize for Economics in the year 1990, clearly failed to take into account the manoeuvres of capital markets while formulating his theory. That’s because the basic premise of his theory of international investment and the benefits of having a geographically diversified portfolio rests entirely on correlation between different domestic securities and foreign ones than between different domestic securities. Evidently, since the time Markowitz penned down his unique theory, capital markets have evolved a lot beyond what MPT can comprehend, a finding backed by empirical data; both current and historical. In summary, the correlation between markets, the world over, is slowly and steadily turning positive and reaching closer to one – a situation which Markowitz did not expect.Stocks the world over now move in a more synchronised pattern than at any time in the past two decades. Similar kind of returns from emerging & developed markets, and even elsewhere, have made it difficult for investors to increase returns from the ‘so-called’ Markowitzian diversify cation technique. For example, the correlation between the Morgan Stanley Capital International (MSCI) World Index and the MSCI World Small Cap Index in 2007 has increased to a mind-boggling 0.96; the highest since 1995.
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Source : IIPM Editorial, 2007
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative
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