Diversification: Should We Be Diversifying Trends?

摘要

In the aftermath of the recent financial crisis, an increase in correlations between asset classes was frequently cited as having rendered diversification strategies ineffective and, thereby, causing unexpected losses to investors. This observation refers to diversification across assets in order to reduce the noise in returns. But there are two problems with such an approach. First, empirical evidence suggests that the returns of financial assets (measured as the logarithm of returns) are not normally distributed, but exhibit heavy tails. Second, market indices do not follow random walks.