Under the full segmentation assumption, the relevant global portfolio is the individual market so that the correlation between the market and the global portfolio in the formula is__.
A) 1
B) 0
C) Between 1 and 0
PS: Answer in Kaplan B2. Session 7. P 78
A - 1 (As the relavent global portfolio is the individual market)
Jup, 1, because there is no diversification benefit. That’s why the corrleation coefficient is 1.
Yes, it’s A. However, the corrleation coefficient is 1 means if the global market collapse, the segment market will collapse as well…Not very intuitive.
yeah - if you are fully segmented - your global market is your local market. so your local market is collapsing…
Thanks Cpk. Seems the market is fully integrated or segmented will have the same result?
I think it’s a touch more complicated then that.
If your market is completly segmented from the rest of the world, your relevant global market is your local market.
Therefore, when someone in this local market says “the global market is collapsing” they’re actually referring to their local market because in their view there is no other market. They’re completly isolated
Yes, Thanks.